Financial and Management Accounting: Comparing and Contrasting

Introduction

Users of financial information in a company come in two major forms – internal and external. Each of the users requires accounting information in different forms and types. The timing of their need for financial information is also different. Due to the different financial information users, the need for financial and managerial accounting arose to cater to different needs. External users of financial information require standardized information that is regulated by authorities to ensure that it is reflective of the true and fair state of affairs. This is critical in guiding the process of decision making. For internal users, financial information is often used for the improvement of current processes and practices and as such, standardization of reporting systems and methods is not necessary across different companies. Internal users make decisions aimed at improving efficiency and will mostly go for managerial accounting information. On the other hand, external users will find financial accounting information important for comparative reasons, hence the need for standardization. This paper will put both managerial and financial accounting side to side and look for similarities and differences.

Comparing Financial and Management Accounting

Financial and management accounting are two different disciplines with significant differences. Management accounting allows a link between financial and business strategy; a concept that hands to management operational leadership, which is critical in value generation besides enhancing the sustainability of the venture. As financial and business strategy link, managers find positions of alignment with reference to resources and important activities in areas of priority to ensure the optimal financial position is assumed by the firm as explained by Drury (2015). Management accounting is the tool that managers use to heighten their understanding of the different cost centers, as well as, their operational transparency and providing an assessment of how these two align with the organizational goals.

As opined by Fullerton, Kennedy, and Widener (2014), management accounting focuses on the provision of controls, reporting, and management of internally directed and also futuristic financial inputs. As a result, management accounting provides management with an in-depth management and control methodology of a firm’s performance relative to the goals set by the organization. Ray (2006) provides that management accounting enhances the pro-active management of aspects such as costs, risks, performance, and efficiency. From Ray (2006), it is easy to deduce that management accounting is the ultimate link between financial strategy, business strategy, and actual performance. It is out of management accounting that trust with management can be established or ruined.

Financial accounting, on the other hand, provides historical information. The major consumers of such information are the stakeholders of a firm, the public, authorities, competitors, and any other interested parties. The information is provided as expected in accordance with the law. The information is provided in accordance to set standards and within stipulated timelines for the consumption and review of the mentioned parties. Financial accounting is the consequence of managerial accounting. Financial accounting provides a reflection of how well management accounting as a principle has been put into action within the firm as explained by Weißenberger and Angelkort (2011).

Contrast Between Financial and Management Accounting

Management and financial accounting are inherently different as evaluated in the following points.

1. Financial accounting information is often designed to reflect back on prior happenings while management accounting is futuristic. As such, management accounting is critical in problem-solving, especially with foreseeable problems.
2. Management accounting does not follow any established rules for reporting. It emphasizes the need for operational information, which is important to internal consumers in different departments where costs and/or revenues are incurred or generated respectively. Such departments are expected to enhance their efficiency out of using such information. On the other hand, financial information follows established rules of reporting and it provides information related to the financial status and efficiency (in terms of profits). Such information is designed to cover the needs of different consumers of such information who include; authorities, creditors, investors, competitors, and the public among other parties.
3. Financial accounting addresses the question of efficiency expressed in terms of profits, while management accounting provides information addressing concerns of the problems facing the firm, and providing quantitative suggestions on how such problems can be solved.
4. Financial accounting is wholesome; it delivers a report of the entire firm’s operations for a considerable amount of time ranging from a quarter to a whole fiscal year. On the other hand, management accounting reports specific information with regards to a cost center. The time factor considered is not standardized.

Conclusion

Both management and financial accounting are important and relevant disciplines in a firm, as none can replace the other. One (financial accounting) is emphatic about the historical performance of the firms while the other (management accounting) provides important guidelines in the direction to be adopted with regards to the firm. Financial accounting provides the motivation to adopt better managerial accounting skills, principles, and attitudes. To complete the cycle, managerial accounting has a significant consequence on the dimension adopted by financial accounting and the wellbeing of the firm.

References

Drury, C., 2015. Management and Cost Accounting. Cengage Learning EMEA, Issue 9, pp. 67-77.

Fullerton, R. R., Kennedy, F. A., & Widener, S. K. (2014). Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7-8), 414-428.

Ray, P. (2006). Managerial Accounting for Business Decisions. England: Pearson Education Limited.

Weißenberger, B. E., & Angelkort, H. (2011). 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.