Question

In: Accounting

2       Distinguish between management accounting and financial accounting. Hint: -          Meaning of Managerial Accounting and Financial...

2       Distinguish between management accounting and financial accounting.

Hint:

-          Meaning of Managerial Accounting and Financial Accounting

-          Definitions of Managerial Accounting and Financial Accounting

-          Differences between ‘Financial Accounting’ and ‘Managerial Accounting’

-          Conclusion

Solutions

Expert Solution

Answer : Distinguish between management accounting and financial accounting are as follows -

1. Meaning of Managerial Accounting and Financial Accounting :

Managerial Accounting : concerned with operational reports, which are only distributed within a company

Financial Accounting : reports on the profitability of a business

2. Definitions of Managerial Accounting and Financial Accounting :

Managerial Accounting : Management accounting also is known as managerial accounting and can be defined as a process of providing financial information and resources to the managers in decision making. Management accounting is only used by the internal team of the organization, and this is the only thing which makes it different from financial accounting.

Financial Accounting : Financial accounting is a specialized branch of accounting that keeps track of a company's financial transactions. Using standardized guidelines, the transactions are recorded, summarized, and presented in a financial report or financial statement such as an income statement or a balance sheet.

3. Differences between ‘Financial Accounting’ and ‘Managerial Accounting’

There are a number of differences between financial and managerial accounting, which fall into the following categories:

  • Efficiency. Financial accounting reports on the profitability (and therefore the efficiency) of a business, whereas managerial accounting reports on specifically what is causing problems and how to fix them.
  • Reporting focus. Financial accounting is oriented toward the creation of financial statements, which are distributed both within and outside of a company. Managerial accounting is more concerned with operational reports, which are only distributed within a company.
  • Standards. Financial accounting must comply with various accounting standards, whereas managerial accounting does not have to comply with any standards when information is compiled for internal consumption.
  • Time period. Financial accounting is concerned with the financial results that a business has already achieved, so it has a historical orientation. Managerial accounting may address budgets and forecasts, and so can have a future orientation.
  • Valuation. Financial accounting addresses the proper valuation of assets and liabilities, and so is involved with impairments, revaluations, and so forth. Managerial accounting is not concerned with the value of these items, only their productivity.

4.  Conclusion :

  • Both accounting are great tools for management to run the business well.
  • Management accounting is solely devoted to serving management decision making; but without financial accounting, its function would be limited and narrower.
  • Financial accounting, on the other hand, is mandatory as per the statutory requirement. It needs to be prepared because legally every company is bound to disclose right and accurate information to the potential & existing investors and governments.

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