Principles of Accounting Essay Sample

Published: 2022-06-27
Principles of Accounting Essay Sample
Type of paper:  Course work
Categories:  Accounting
Pages: 7
Wordcount: 1733 words
15 min read

In accounting, there are many types of accounting. But there are two most important types of accounting, management accounting, and financial accounting. Financial accounting is concerned about keeping the accounting records in the financial statements such as income statement while managerial accounting is worried about cost estimation and budgeting to help in the future decision. The different between managerial accounting and financial accounting is based on future and past orientation although other factors distinguish one from the other. The primary focus of financial accounting is to ensure that the company prepares good accounting records to its stakeholders while management accounting is mainly focused on providing accurate information to help management in operating the company effectively. For that matter, it is true that management accounting is future-oriented and financial accounting is past orient.

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Managerial accounting is mainly used for internal decision to ensure that the business organization is run efficiently (Ray and Garrison, et al, 2017). In managerial accounting, there are very many tools such as breakeven point analysis and cost estimation methods which are used to make decisions. The decision made in managerial accounting is focused on the future performance of the organization but not in the past. For example, the breakeven analysis is used to assess the business performance by establishing whether the company is viable or not.

Financial accounting is used for external decision making based on the past accounting records. External stakeholders such as investors require past financial records to see the past performance of the business organization for the purpose of verification but not to improve future performance. It uses financial reports such as income statement to show past performance. It, therefore, does not provide information that the company requires for improving performance but for external stakeholders to decide whether to invest in the company or not.

Managerial accounting helps in planning and formulation of the future policies. Administrative accounting tools such as variance analysis, budgeting and cost estimations assist managers in creating a sound financial plan for the business. Since planning is a way of making an advance decision on what is expected to be done, the best way to be done and who should do it. Management accounting is an essential tool that allows managers to create a good plan the business uses in the future (Drury, 2007). Managerial accounting tools help the management to create good forecast using the available financial information, set goals, formulate policies and find out the alternative strategies and finally come with the program of activities that the business organization plans to undertake (Ray and Garrison, et al, 2017). Therefore, planning is a process of creating an intelligent forecast based on facts derived from past accounting information upon which forecasts are made. This is achieved through budgetary control and the creation of variances.

On the contrary, financial accounting is only based on keeping accounting records but not planning. It only involves in keeping financial records required by a managerial accountant to make a financial forecast. Financial accounting, financial information is used to prepare financial statements such as the cash flow statement and the balance sheet. It only applies accounting principles and policies when preparing accounting records which cannot help in the preparation of good financial forecasts such as budgets.

Managerial accounting helps in controlling organization performance. It is a significant administrative control device as it uses variance analysis to discover the differences in past and current performance. In the process, it controls the future production of the organization. Managerial accounting also seeks to separate the organization into distinct responsibility centers where each operation is done. One person is in charge of each responsibility center where planning, budgeting and the execution of the organization plans and standards are made (Ray and Garrison, et al, 2017). It is the responsibility of managerial accountants to control the performance of every responsibility center and ensure that necessary actions are taken to correct any adverse variance in the budget. In the process, they identify weak points and take corrective measures which do not conform to the planned outcome. As a result, managerial accounting is responsible for performing control functions through the use of budgetary control and standard costing. Control functions help the future performance of the organization but not the past, and therefore managerial accounting is based on the future performance of the organization but not past performance as it is in financial accounting.

In a financial statement, there is no budgetary control which is essential in controlling the performance of the organization. It only presents financial information is a perfect format that users of financial statements can understand (Ray and Garrison, et al, 2017). Financial accounting only provides accurate financial information required by external stakeholders. It does not have tools such as variance, budgetary control, standard costing and process costing which are essential in ensuring that the company or business organization operate according to its budget. There are no tools in financial accounting that can be used to compare budgeted figures with actual figures to determine performance variance (Drury, 2007). It, therefore, cannot help management of any business organization control its future performance but instead only ensure that the company has roper historical financial records.

Managerial accounting is used to analyze financial information for future use. It uses variance analysis to identify problematic areas in the organization and try to provide an appropriate course of action to solve such problems in the future. In managerial accounting, variance analysis is used to check whether the business organization operates as it is expected (Ray and Garrison, et al, 2017). It can identify whether there is overproduction or under production in the company comparing budgeted production level with actual production level. In the process, it identifies what causes underproduction and finally develops a course of action that can provide a solution to such problems. It also uses break-even analysis to find out the level of production in which the company will start generating profit. The results of these analyses are used to support the proper performance of the organization. They predict how the company will be in the future using current information.

Financial accounting does not involve analysis but recording, keeping and preparing financial statements using past financial information. It does not include in any economic analysis to predict the future performance of the organization but outline financial information in a given format for external users. Financial accounting does not concern with the profitability or viability of the company, but it is concerned about the accuracy of the financial information presented to external users (Ray and Garrison et al., 2017). As a result, it is less concerned with the ways the company can improve its future financial performance as opposed to managerial accounting which is mainly focused on ways which the company can enhance its future profitability.

Financial accounting uses historical accounting information. In financial accounting, past accounting records such as ledger accounts are used to prepare financial statements. It does not use future financial information such as forecast but relies on historical records to provide an overview of the business organization performance. The information provided in the financial statements comprise information collected during a given financial year and therefore does not reflect current or future financial information but past financial information.

Managerial accounting uses historical information to predict future results (Ray and Garrison, et al, 2017). It usually depends on the forecast and financial plans which are aimed at improving the future performance of the organization. In most cases, it is concerned with what the company expects to get in the future but not what the company has received in the previous financial years.

Managerial accounting is essential in organizing future organization structure. It recommends the organization to have good budgets to help it in proper planning and enhance good financial control, establish good responsibility accounting which ensures that every organization stakeholder is responsible enough to support the organization performance (Drury, 2007). In addition, it encourages the business organization to use both cost control methods and internal control to ensure it minimizes wastages and improves efficiency. To apply these measures, it is essential to understand the entire organizational structure. It, therefore, helps the organization rationalize its future structure.

Because financial accounting is only concerned about the accuracy and correctness of financial information in the financial statement, it does not recommend the use of budgetary and cost control methods. As a result, there is no need to examine the organization structure thoroughly. It is therefore tough to rationalize the structure of the organization which is vital in creating a functional organization structure in future. All these steps are focused on the future but not on past business operations.

Management accounting majorly deals with decision making (Ray and Garrison et al., 2017). It contributes to the provision of accounting information that helps in making of business decisions. It provides the data at that stated time. Financial accounting deals with past transactions. Hence it involves the use of previous transaction records.

Financial accounting involves transactions done outside the organization. It means people like the shareholders, investors and even banks. It majorly provides accounting information outside the company, but it also helps the managers to get some information on accounting to make decisions that are useful to the company.

Management accounting operates within the company. It is concerned with managing the risks that are accounted in the company. It identifies this risks, reports them to protect the goals that have been set by the company. It deals with the performance of the company. This means that it ensures there is making of good decisions that improve the performance of the company. Management accounting also provides that strategies are created to help the business succeed in future. It also provides that resources are well utilized in the company in that there is the optimal use of those resources (Ray and Garrison et al., 2017). It also ensures that the business is well planned and there is proper building up of the business. It also ensures the safety of the assets of the company. Managers also check on the selling costs and labor costs to ensure that finances are well used.

Financial accounting involves the use of financial statements which comprises of the income statement, the report of financial position and the cash flow this clearly shows how it's historic because all this provide past transactions. Transactions that were made in the past. It also deals with past reporting of accounting information to the whole business.

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