Major Differences Between Financial and Managerial Accounting

Identify some of the major differences between the fields of financial and managerial accounting. Compare and contrast these differences in terms of usefulness to managers for decision making. How do organisations cope with managers who have little knowledge of accounting? Management Accounting in broad terms is useful for the internal management for planning, controlling and decision making by analyzing the cost aspects impacting the company on the other hand financial accounting is concerned with the stakeholders external to the company, primarily the investors (Williams, Haka Bettner, 2005). The major differences between the financial and management accounting can be studied based on the users, guidelines, purpose and type of information. These have been discussed below Users: As mentioned above management accounting in broad terms is useful for the internal management while financial accounting is concerned with the stakeholders external to the company, primarily the investors. Guidelines: There are no set guidelines for the preparation of the report under management accounting. The reports are prepared as per the need of the management and those that can assist decision making. The financial accounting reports are prepared as per the accounting principles. There are set guidelines and any deviation from these guidelines isnt acceptable (Williams, Haka Bettner, 2005). The financial accounting reports have same format that are followed by the companies while the management accounting report will certainly be different. Purpose: The purpose of the management accounting is to assist the management in the decision making while the financial accounting reports are the basis for the investors to study the performance of the company and accordingly take the investment decision. Type of information: the information contained in the management accounting are specific to project and vary as per the needs of the management. The financial accounting reports include general purpose information. Another important point is that certain assumptions may be made in management accounting while very few estimates are made in financial accounting. Apart from this the frequency of preparation of financial accounting reports is as per the guidelines which may be annual or quarterly. The management accounting reports are prepared as and when required by the management. Usefulness in Decision Making Management accounting and financial accounting have their importance in decision making. The reports prepared under management accounting are important for the internal management (Warren, Reeve Duchac, 2012) while the financial accounting is important to analyze the past performance and take suitable business and investment decisions (Kermit, 1997). The viewpoint and importance of management accounting and financial accounting is different. The reports prepared by management accounting are not disclosed and enable the companies to take decisions to control various parameters that can impact the performance. The effectiveness of decision taken by the internal management is based on the management accounting. The decisions taken will in turn impact the financial performance of the company. This will have an impact on the financial accounting reports and the decision taken by the investors. The viewpoint of investors will impact the availability of resources and the expansion or other future plans of the internal management. the above discussion clearly highlights the importance and relation of management accounting and financial accounting in decision making. Viewpoint of Organizations It is very important for the companies to have managers in having good knowledge of accounting. In absence of this it becomes very difficult for the companies to perform as there are certain factors that can impact the performance of the companies and have effect on the long term sustainability. In order to cope up with the limitations of managers in utilizing and development of accounting information the companies use specific tools that can be used intelligently and significantly reduce the dependency on managers to prepare the reports (Siddiqui . Siddiqui). Once the reports are prepared the decision making is left with the management of accounting. Further from the viewpoint of investors certain ratios can be calculated that are related to certain important factors such as profitability, liquidity and the amount of leverage taken by the companies. This simplifies the analysis and decision making to a certain extent. References Scapens, R.W.(2006) Understanding management accounting practices: a personal journey, The British Accounting Review 38(1), pp.130 Siddiqui S.A. Siddiqui A.S . (n.d.). Managerial Economics Financial Analysis. New Age Williams, J.R., haka, S.F. Bettner, M.S. (2005). Financial Managerial Accounting. Published By: McGraw-Hill/Irwin. 13th edition Warren, C.S., Reeve, J.M. Duchac, J.E. (2012). Financial Managerial ccounting, Cengage Learning. 11th edition Kermit D.L. (1997). Essentials of Financial Accounting information for Business Decisions.Seventh edition. Irwin McGraw-Hill Chapter Two