Financial accounting can be defined as the process that involves recording, summarizing, and reporting a company or an organizations business transaction through financial statements. These reports are accurate information and are based on Generally Accepted Accounting Principles (GAAP). There are four financial statements: income statement, balance sheet, cash flow statement, and retained earnings statement. On the other hand, the managerial accounting involves identifying, measuring, analysing, and communicating financial information to the managers to assist the management of that particular company in making well-informed decisions. Managerial accounting also is used to hold the business to account for transactions made over a particular period. It also helps the management better perform its functions of planning, directing and controlling through policymaking (Weißenberger & Angelkort, 2016).
Another difference between the two forms of accounting is that financial accounting deals with the business as a whole. The transactions have to be accurate at it is guided by conventions and principles. On the other hand, management accounting has limited coverage, and its reports are not precise as estimates and approximations can be used. It has no guiding principles and conventions except maybe those set up by the company itself. Financial accounting and management accounting are both circulated internally by the company, and financial statements generated from financial accounting are the ones that aid in managerial accounting.
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In financial accounting, there are two different accounting firms involved: cash accounting and accrual accounting. Cash accounting records cash transactions made by employees of an organization, and these at times are not recorded in financial statements. That is, it recognizes expense and revenue when money changes hands. Accrual accounting involves the recording of all transaction data, that is, it identifies revenues earned and all billed expenses even those that have not yet been paid for. This accounting gives a clear picture of the state of its assets and liabilities, and they can aid in the final decision making by the organization's management.
Principles and conventions guide financial accounting, and some of those principles include (Owsen et al., 2015) ; economic entity assumption, which involves ensuring separation of business transactions and the owner's private purchases. This ensures that the business can fully flourish away from the influence of its owner’s private expenditure. This principle also stipulates that if there are multiple businesses, each of their financial records have to be kept separate to ensure financial independence.
The monetary belief requires that all financial transactions be reported in one currency: the U.S dollar. This would help to harmonize all business transactions and enable the financial reports to be easily analysed by the stakeholders. The cost principle involves the documentation of all economic activities over a specific period to give stakeholders a complete understanding of how much capital was spent over a certain period. This principle requires that the original costs during purchase of assets, liabilities or equity investment should be recorded and not their current market value. The current market value for these items can either increase or decrease depending on a number of factors, so this principle would help to show the actual expenditure of the company at the actual time of the purchase.
The full disclosure principle requires that all financial information be made available to investors, lenders and to the public at large. This information would help the outsiders to form educated opinions about the company. This would also enable them to better understand the company's financial state. The other one is the matching principle which requires an organization to use accrual accounting rather than cash accounting to show how company expenses align with its capital. This principle requires that all the expenses incurred by a company during a certain period be recorded for comparison with the total revenue earned during that same period for example, an asset’s purchase is spread out over years that it is useful and productive but not as an expense for the year it was purchased.
The next principle is materiality which requires that the company's product is paid for promptly. Materiality concept also concerned about the relevance of accurate information about the size and nature of transactions. This concept requires that this information be reported accurately in the company’s financial report to ensure that all the stakeholders are well informed.
Conservatism is another principle that helps a company to show potential future losses and, in turn, help to prevent them. The principle identifies expenses and liabilities early enough when there exists some uncertainty about the outcome and in the same regard, it also identifies assets and revenues, specifically profits, when the company is sure that it will be accrued. This principle also aids an organisation in making estimates for its expenditure.
Example
For example, recently, Tesla, Inc has been on the news with its development of electric cars, which helps accelerate the world's transition to the use of sustainable energy. . This transition is in a bid to reduce environmental pollution brought about by dependence on the use of petroleum products as a source of energy. The company is championing the use of electricity and solar energy to power its vehicles. The company's annual reports are made available to the public and its shareholders, operating expenses, and revenue generated. The report also offers all of the company's tax reports and gives a well-detailed breakdown of the total revenue accrued over the year. (Abakumov, 2021)
From this report, Tesla's stakeholders were provided with a good baseline for proper analysis of the company's financial health by dissecting its expenditure and comparing it to the gross net annual income. Tesla's stakeholders include; its employees, its investors, its customers, government, its competitors, suppliers, shareholders and the community. From this information, the stakeholders can make informed decisions and recommendations to the company's management to help it pull ahead of its various competitors. From these financial statements, the stakeholders develop their analysis reports, which provide the company with a competitive advantage over other automotive sectors.
Tesla's financial reports also help its creditors and shareholders to assess the company's solvency and creditworthiness of the company. Creditworthiness is a company’s credit rating which is the basis that banks and other lending institutions assess an institution’s ability to service its loans. After it had been made public, this financial report allowed the company's portfolio to grow. The company's stocks went up through this, and there was an upsurge of people purchasing the company's stocks. This served to increase Tesla's revenue and profits. It also gave the company's suppliers assurance of the company's future success and thus helped maintain excellent relationship and build loyalty with such stakeholders.
The publishing of its financial reports also helped Tesla receive a massive injection of capital through the sale of its shares. The financial statements helped to convince many potential stakeholders of the many benefits of investing in this company. The capital gained from these transactions helps grow the company even further and thus ensure its position as the leading organization in the automotive industry, especially in the manufacture of electric cars and autonomous trucks.
The company also enjoys massive support from the government. This is because many government policies are geared towards reducing environmental pollution and Tesla is championing this. The government policies create an enabling environment for the business to thrive and it also funds these projects helping to improve the company’s revenue stream.
Tesla's financial reports also helped the company's management make well-informed decisions on allocating its resources to ensure maximum business growth and success. These financial reports helped the stakeholders make recommendations on strategies that the management can utilize. This report also showed that the company was making good progress towards achieving sustainable energy, which helped it get massive support from the government.
In terms of competition, Tesla can outdo its other competitors in the automotive industry despite its young age. In the automotive industry, Tesla Inc. is still a new company, but its focus on the use on clean energy for example solar energy over the conventional sources gives it an excellent competitive advantage over other older companies in this sector. Its financial reports are thoroughly broken down and the external shareholders inform the company where it needs to improve to ensure its continued success. The financial information also displays the company's involvement in community development activities, which help grow its image and serve as an excellent marketing strategy.
References
Abakumov, E. (2021). Tesla Motors Inc. Stakeholders' analysis. Academia.edu. Retrieved 5 April 2021, from https://www.academia.edu/35202361/Tesla_Motors_Inc_Stakeholders_analysis.
Owsen, D., Goedde, H., Kintzele, P., Pointer, M., Stephens, R., & Sisaye, S. et al. (2015). Book Reviews: Financial Reporting & Analysis; Principles of Accounting; Advanced Accounting; Financial and Managerial Accounting; Advanced Financial Accounting; Cost Management: A Strategic Emphasis; Advanced Accounting; Financial Accounting; Management Accounting; Auditing and Assurance Services; Electronic Commerce. Issues in Accounting Education, 18(4), 347-344. https://doi.org/10.2308/iace.2002.17.3.347
Weißenberger, B., & Angelkort, H. (2016). Integration of financial and management accounting systems: The mediating influence of a consistent financial language on controllership effectiveness. Management Accounting Research, 22(3), 160-180. https://doi.org/10.1016/j.mar.2011.03.003
