|Type of paper:||Essay|
|Categories:||Finance Accounting Financial management|
Financial and managerial accounting are the two main branches of accounting and have both similarities and differences. Financial accounting refers to the preparation of reports for use by external parties such as shareholders, lenders, investors, customers, and creditors. On the other hand, managerial accounting refers to the development of accounting information for use by managers within an organization. The following paper compares and contrasts these two branches of accounting while giving a real-life example demonstrating how financial accounting is of help to external stakeholders in the making of informed decisions.
To start with, financial and managerial accounting share a number of similarities. One of the similarities is the fact that both are branches of accounting that serve to provide users with accounting information (Ingram, Albright & Hill, 2003). Both branches of accounting provide internal and external users with key financial information despite the users being different. The aim of providing information is mainly to help in making informed decisions. As earlier stated, financial accounting provides information to external users such as creditors, lenders, and investors helping them decide on buying, lending or selling equity while managerial accounting provides company managers with the relevant financial information they need to make decisions related to the better running of the organization. Another similarity is that both financial and managerial accounting generate financial reports which are essential to performance evaluation (Ingram et al., 2003).
In both practices, accountants prepare information in the format of a report for review by either executives or managers. Though the formats are different, there are general accounting standards that govern the preparation and presentation of financial accounting data, which makes the comparison of data across different organizations easier. Further, in both practices, education expertise in accounting is a key requirement (Kimmel, Weygandt & Kieso, 2011). The programs used in both accounting branches require individuals who have taken classes in the field of accounting. This is demonstrated by the fact that organizations value accountants from both fields and require them to have knowledge specialization in the area.
When it comes to differences, financial and managerial accounting differ in many aspects as well. One of the differences is in the users of the reports as noted in the above section. While financial accounting information is mainly used by external parties, managerial accounting information is mainly for an organization's internal management. Another difference is related to the usage of reports from the two accounting practices. Financial accounting reports lack significance to organizational processes such as staffing, controlling, planning, decision-making and directing (Studies in Managerial and Financial Accounting, 2013). In contrast, managerial accounting reports are critical to proper organizational planning, staffing, decision-making and controlling. Also, while financial accounting is reported to the public, managerial accounting is mainly for organizational use and hence very confidential. This is in addition to the fact that the preparation of financial accounting follows a prescribed format whereas for the management accounting practice, no prescribed format is followed (Ingram et al., 2003).
Further, financial accounting is compulsory for any organization for purposes of auditing unlike the case in management accounting where the practice is optional as it requires no auditing. Financial accounting mainly focuses on reporting for an organization as a whole while this is not the case in managerial accounting whereby the latter primarily focuses on the segments and parts of an organization. Moreover, unlike in managerial accounting where the information needed should be relevant even if it is nonobjective or verifiable, financial accounting requires objective and verifiable data (Kimmel et al., 2011).
A real-life illustration of how financial accounting can be helpful to external stakeholders when making informed decisions is in the purchase of an already running business such as a hotel that is currently operational. For external stakeholders to decide on whether to purchase the hotel, it is necessary to have access to the financial data of the business. Through the available financial information, the stakeholders are able to see the hotel's revenue trends. For instance, there will be times when the revenue collected by the hotel is high while sometimes, a decrease in revenue would be experienced. It is essential to enquire from the owner and locals about the possible reasons behind specific financial performance trends. This will give new insights into the factors that affect the hotel's performance at different times of the year. For instance, there is the need to know why the hotel's revenue decreased at a particular time as this would help the stakeholders come up with strategies to ensure such occasions do not occur ones the hotel is under their ownership. Also, from the financial documents provided, the interested stakeholders can estimate whether investing in the hotel would be feasible and reasonable based on the hotel's capability to give back the expected returns. Therefore, based on the financial accounting information
In conclusion, as demonstrated herein, despite the similarities existing between financial accounting and managerial accounting, the two branches of accounting also differ significantly. Some of the key similarities noted include the fact that both are branches of accounting, both generate financial reports, both use a report format in the presentation of information as well as both requiring education expertise in accounting. On the other hand, key differences were noted in relation to the users of the accounting information provided, usage of the prepared reports, the significance of reports prepared by each accounting practice to organizational operations as well as whether performing each practice is compulsory for companies. Finally, this paper has demonstrated through a real-life example, of an already operating hotel, how financial accounting is of help to external stakeholders in the making of informed decisions.
Ingram, R. W., Albright, T. L., & Hill, J. W. (2003). Managerial accounting: information for decisions. Australia: South-Western College Pub.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2011). Accounting: tools for business decision making. Hoboken, NJ: Wiley.
Studies in Managerial and Financial Accounting. (2013). Intellectual Capital and Public-Sector Performance Studies in Managerial and Financial Accounting, Ii. doi:10.1108/s1479-3512(2013)0000027016
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