Financial and Managerial Accounting

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Financial and Managerial Accounting 

Financial accounting is a specialized branch whose role is to record, summarize, analyze and report a business financial transactions. In other words it is the process that focusses on preparing a company’s financial statements to enable organizations present their financial standing and performance to the parties outside the company such as the government, creditors, customers, suppliers and investors. As explained by Easton (2013), the function of financial accounting uses standard guidelines to keep track of an organization’s financial transactions. In majority of organizations, financial accounting is used to gather data and produce reports pertaining a company’s financial activity. Financial accounting records transactions and presents them using financial statements such as income statement or statement of financial position. Managerial accounting on the other hand is a field of accounting that identifies, measures, analyzes and interprets accounting data to enable organization managers to enact requisite decisions for the pursuit of organizations objectives ( Warren et al., 2013) . Put differently, managerial accounting provides financial resources and information to assist managers in decision making. Although financial and managerial accounting share multiple similarities the two also have distinct differences. 

Comparing 

Both financial and managerial accounting provide accounting information to various users. According to Easton (2013), both branches of accounting exist to avail valuable financial data to users. As asserted by the Financial Accounting Standards Board, financial accounting provides information to potential and existing users such as creditors, investors and lenders to enable them make information decisions for example regarding debt instruments or concerning buying and selling of equity ( Warren et al., 2013) . Similarly, managerial accounting also provides relevant information to internal users such as an organization managers so that they can enact prudent decisions on the most appropriate ways to run a company. Although the users of financial and managerial accounting differ, both functions however exist to provide financial information to enable decision making. 

Both fields of accounting generate financial reports. In financial and managerial accounting, the accountants present accounting information in a report format for review by an organization’s executives and managers. Some of the reports produced by financial accounting include a balance sheet, statement of stockholders’ equity changes, income statement and cash flow statement. The reports generated by managerial accounting include budget reports, cost managerial accounting reports and account receivable aging reports, performance reports, job cost report as well as inventory and manufacturing reports. 

In both financial and managerial accounting, the accountants are required to have accounting education and expertise. The two fields require students to undergo rigorous training in managerial and financial accounting prior to being awarded an accounting degree. Organizations value both accounting fields and therefore make it a compulsory requirement for one to have specialized knowledge or certification in each area. Individuals intending to pursue financial accounting must acquire certified public accountant designation or CPA which is a gold standards for accountants globally ( Easton, 2013) . In managerial accounting, one is required to pursue a certificate in management accountant designation or CMA prior to absorption into the accounting filed. CMA designation focuses on areas such as decision analysis, performance and cost management. 

The two fields are similar since each requires knowledge on accounting information system. In management accounting, the accountants require accounting information system to enable them present data to organization managers. Similarly, in financial accounting, accountants should be equipped with information system knowledge to enable them audit financial information presented digitally. In today’s modern world, majority of organizations no longer use paper records to keep track of financial information but use computerized methods. As such, accountants in both functions should be in a position to comprehend the functionalities of an accounting information system. 

In both financial and managerial accounting, internal controls are necessary. Management accountants assist organization managers to design and implement internal controls necessary to protect pilferage of a company’s money and assets. Similarly, financial accountants check for the presence of internal controls during audit exercises. Effective internal control ensure that an organization is adhering to stipulated cash management guidelines. 

Contrasting 

The two accounting fields differ with respect to their main objectives. The primary objective of managerial accounting is to avail valuable information for an organization’s internal use. Budget reports and performance managerial reports are generated for use by an organization’s managers for decision making. The information provided by managerial accounting is used by managers for internal uses such as strategic planning, setting realistic goals and in encouraging efficient resource utilization ( Warren et al., 2013) . In sharp contrast, financial accounting focusses on providing information for external users unlike managerial accounting which avails data for internal users. The financial statements or final reports generated through financial accounting are designed to inform external users about an organization’s financial health or business performance. Whereas financial accounting is created for industry regulators, investors and creditors, managerial accounting is designed for use by a company’s management. 

Information generated through financial accounting is based on past statements which makes the field entirely historical. Financial statements such as balance sheet or profit and loss account contain data for a previous defined period. Managerial accounting however assesses an organization’s past performance and makes business forecasts. Managers base their business decisions on the predictions made. To a large extent, financial accounting is backward-looking unlike managerial accounting which is forward-looking. Financial accounting does not make any forecasting unlike in managerial accounting which generates predictions to enable decision making. 

Managerial and Financial accounting differ with regards to regulation and uniformity. One of the notable and practical distinctions between the two accounting fields relate to their legal status. Managerial accounting produces reports which are circulated internally which implies that organizations have the liberty to create their own internal rules and system on managerial reports ( Weygandt et al., 2018) . Managerial accounting has no centralized system that regulates reports unlike in financial accounting. In sharp contrast, financial accounting reports such as balance sheet and income statement are highly regulated. Since the financial statement reports are released externally for consumption by users such as investors, organizations must follow standardized guidelines when making calculation and in reporting of figures ( Weygandt et al., 2018) . The Financial Accounting Standards Board (FASB) drafts financial accounting guidelines for use in the US. The accounting principles create uniformity unlike in managerial accounting which lacks consistency of rules. 

Real Life Example 

Potential Investors in Apple Inc. rely on the company’s financial statements to make investing decisions. The investors heavily depend on the income statement, cash flow statement and balance sheet generated bi-annually or annually to decide if it is prudent to purchase company stock. The financial statements generated by Apple Inc. helps potential investors make decisions about valuation and creditworthiness of the company. The statements enable the external potential and exiting stakeholders to set price targets and consequently make a determination on whether the company stock price is fairly valued or otherwise. The financial statements enable investors to understand Apple Inc. financial health on bond issues and stock. 

References 

Easton, H. (2013). Financial & Managerial Accounting for MBAs, 6e. 

Warren, C., Reeve, J. M., & Duchac, J. (2013).  Financial & managerial accounting . Cengage Learning. 

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018).  Financial and managerial accounting . John Wiley & Sons.