Companies make use of accounting to check on their current operations, forecast on the future operations or analyzing the past performances. The two most significant accounting methods that businesses use to report on their activities are financial accounting and managerial accounting. Financial accounting is the process of preparing, analyzing, summarizing, and reporting business financial activities over a past period. It reports on a historical basis, as a result helping its users to analyze the company’s previous performances. This branch of accounts involves summarizing and preparation of financial statements, which include the Balance Sheet, Income Statement, and the statement of Cash flows for public consumption. Some of the firms’ stakeholders who use the financial accounting reports are the shareholders, government agencies, banks, employees, suppliers, Board of Directors, and any other interested party.
Managerial accounting, on the other hand, is the field of accounting concerned with identifying, analyzing, and interpreting the information given, with the aim of achieving the organization's objectives (Garrison, 2010) . It involves the provision of information to the companies’ managers, by the management accountant, about the firms’ accounting on which they utilize for decision making to achieve the company's ultimate goals. This corporate information provided by the management accountant is both financial and non-financial information. Because managers use managerial accounting information for day-to-day operations, its preparation depends on the current and forecasted trends in its reporting. The intended information recipients, of this branch of accounting reports, are only the business managers and not the external stakeholders.
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The Financial and managerial accounting have similarities and differences as discussed below.
Similarities
There are several similarities on financial accounting and managerial accounting. One of the similarities is in the area of concern. Both financial accounting and managerial accounting deal with expenses, revenues, and assets. Moreover, they are concerned with assets, liabilities, cash flow, and financial statements.
Another similarity is their preparation, as the two accounting branch use the same database. This similarity is shown by many organizations accounting systems, whose collection and classification of information is in a format, which is useful for both accounting systems. Since the intended recipients for both systems are different, companies employ flexibility in their accounting systems that ensure the usage of the same database to provide different data to different intended users.
Besides, both systems have similarities in the principle of cost allocation and cost accumulation. The concept of cost allocation and cost accumulation for financial accounting is also the same as the principle applied in management accounting for managerial purposes. Both accounting branches allocate their costs to different departments, and their determination is on various accounting period.
Differences
Despite the above similarities, management accounting and financial accounting have several differences. These differences are as below.
Accounting principle used . Financial accounting and management accounting differ in accounting principle used when preparing their financial statements. In financial accounting, accountants must adhere to General Accepted Accounting Principles (GAAP) or International Financial Reporting Standards. While in management accounting, its preparation is not under the regulation of these standard-setting bodies.
Users of these reports . The primary users of the financial accounting statements are the public. Some of the general users include potential investors, creditors, shareholders, customers, and regulatory bodies. The sole users of the management accounting report are the firm’s management. These reports are not for public consumption.
Purposes of reports. Financial accounting reports are prepared for the general analysis. The report shows the company’s previous financial performance, which the stakeholders use it to gauge the financial health of the enterprise. Preparation of Management Accounting report is for the executive to utilize it in making current and future financial company’s decisions.
Time period . Financial Accounting provides reports about historical information, with the general requirement being the previous twelve months. Contrary, Management accounting produces reports, which is for current and for future basis.
Management accounting helps managers to improve on their companies’ operational and financial performance. An illustration of this phenomenon is the case of General Motors Company.
General Motors Company
This is an American multinational company with its main headquarters in Detroit, Michigan. The firm deals with designing, manufacturing, marketing, and distribution of its different brand of cars. Some of the company’s current brands include Cadillac, Chevrolet, and Buick. In addition, separately from dealing with automobiles, the company sells financial services. In 2011, rakings placed General Motors Company, as number one car dealer with a reported 9.025 million units sold worldwide. The business employs management accounting techniques in its daily operations, which has led to the improvement of its operational and financial performance.
Operational performance
General Motors is a large company that has employed Multi-Divisional form as its organizational structure. A Multi-Divisional form is a business structure where different smaller companies use the parent company’s brand name while conducting its business, except they are still under the parent company’s control (Puranam, 2016) . However, major decision- making are left in the hands of the independent companies’ managers. This Multi-Divisional form’s success has been through the utilization of Management accounting techniques, by the management of the General Motors Company, to evaluate individual director’s performances and the whole company. The managers who control these independent companies provide the parent managers with the data utilized in making the decision. This usage of complicated management accounting techniques has assisted General Motors managers in improving its operational performance.
Financial performance
Utilization of Activity-Based Costing (Estampe, 2013) , a managerial accounting method by General Motors Company, has received credit for improving the firm’s financial performance. This managerial accounting method allocates the cost of all activities in the company; to the enterprise’s product according to the actual usage of activity’s resource by this particular product. ABC identifies the cost of General Motors Company’s products by assigning overhead costs to the direct costs. By using ABC, General Motors was able to eliminate non-profitable products from its production line, with the results being an increment in the profitability without increasing costs. Moreover, it assisted the company in identifying a profitable product, which benefited on more allocation of the business’s resources. Furthermore, the method helped General Motors in eliminating non-value added activities like those that duplicate processes; this elimination reduced the total cost incurred, thereby increasing the enterprise’s sufficient income.
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Reference
Estampe, D. L.-D. (2013). A framework for analysing supply chain performance evaluation models. International Journal of Production Economics, 142(2) , 247-258.
Garrison, R. H. (2010). Managerial accounting. Issues in Accounting Education, 25(4) , 792-793.
Puranam, P. &. (2016). Corporate strategy: Tools for analysis and decision-making. Cambridge,London: Cambridge University Press.
