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The similarities between financial accounting and managerial accounting are evident because both are financially motivated, generate monetary statements, possess an explicit group of users and demand a detailed comprehension of accounting theory (Bettner, Williams, Haka & Carcello, 2014). Both offer beneficial fiscal information to potential creditors, lenders, and investors so that they can arrive at appropriate decisions relating to debt instruments, selling and buying equity. They also attempt to quantify the outcomes of business transactions and activity. Importantly, both systems form part of a complete information system, which is utilized in fiscal and management accounting to formulate analysis or reports required (Needles, Powers & Crosson, 2013).
Furthermore, both produce accounting reports for executives and managers to evaluate. For instance, some of the documents they generate include the balance sheet, revenue reports, sales volume, income statements, and accounts of cash flow that indicate the association between assets, revenues, profits, volume and costs (Nilsson & Stockenstrand, 2016). They also utilize the databases for organizing financial reports and statements under their systems. Financial and managerial accounting needs accounting training expertise since they are extensively accepted and recognized professional field. Therefore, students are required to complete training courses before they become specialized experts (Bettner, Williams, Haka & Carcello, 2014). Additionally, both systems are characterized by classifying and accumulating the accounting data for the organization of financial statements. Essentially, similar accounting concepts and principles are utilized in both financial and managerial accounting aiming to achieve cost allocation and cost accumulation (Nilsson & Stockenstrand, 2016).
The similarity of both financial and management accounting is also manifested in term so measurement and determination of cost, sharing of cost diverse segments and departments and their allocation to various accounting periods (Needles, Powers & Crosson, 2013). The principles and concepts, which are utilized in the financial accounting for the aim of cost allocation and cost accumulation, can also be appropriate for management accounting too. Therefore, it suggests that any concept or method which is designed for financial accounting can be applied for generating statements and evaluation in management accounting when they are identified to be essential form managerial dedications (Nilsson & Stockenstrand, 2016).
Financial accounting statements are formulated to be utilized by external users such as creditors and shareholders as opposed to managerial accounting statements, which are intended for managers within the firm (Needles, Powers & Crosson, 2013). They also differ based on the focus on the future. Precisely, since planning is a vital part of management in the firm, managerial accounting is entirely oriented to the future. On the contrary, financial accounting fundamentally offers abstracts of previous fiscal transactions. Such abstracts may be beneficial in planning, although to a point (Bettner, Williams, Haka & Carcello, 2014). In this respect, managers tend to uses estimates of what is likely to occur as opposed to abstracts of what has taken place in the past.
The information for financial accounting is anticipated to be confirmable and impartial. Nonetheless, for inside application, the managers desire data that is relevant although it may not be completely objective (Nilsson & Stockenstrand, 2016). For instance, it is challenging to prove estimates volumes of sales for projected new stores but this type of data is important for managers because it assists them in decision-making. In this regard, the data for the managerial accounting must be flexible to offer the kind of information applicable to a certain decision (Needles, Powers & Crosson, 2013). They also differ in terms of their objectives. For instance, the key objective of fiscal accounting is to reveal the outcomes of the business and its financial situation on a specific data. On the other hand, the managerial accounting’s major objective is to assist in planning by delivering data that is utilized to set or strategize goals or analyze such goals (Nilsson & Stockenstrand, 2016).
Financial accounting is part of legal obligation to the company. The regulations also demand that such statements should be shared with the lender, creditors or investors. Moreover, the rules pertaining to financial accounting are described by international principles. For instance, IFRS and GAAP stipulate the type of rules to be used (Bettner, Williams, Haka & Carcello, 2014). Therefore, organizations are subjects to the regulatory framework, which require them to adhere to standards of fiscal accounting. For instance, in the US, the tax authorities and the Securities and Exchange Commission (SEC) oblige companies to deliver periodic reports. On the contrary, managerial accounting is not mandatory since they are not required under the law. Since managerial accounting, statements are only utilized inside the firm hence they are not exposed to the legal mechanism like financial accounting (Needles, Powers & Crosson, 2013). No regulatory institutions specify the kind of managerial accounting to be provided.
The systems also differ based on the formats of preparation. For instance, financial accounts are prepared using an explicit format in order to facilitate easier comparison of different organizations. Besides, they are fundamentally dedicated to paint a picture of the status of the entire organization. On the other hand, managerial accounting utilizes informal formats because it is only needed in various departments according to their needs (Bettner, Williams, Haka & Carcello, 2014). Therefore, it is concerned with small segments of the company such as sales department and product lines or any other areas that the management believes to be important. The fiscal reporting does not need analyses of costs and revenues per segments when it is reporting to the external persons. However, managerial accounting emphasizes the analysis of each segment (Nilsson & Stockenstrand, 2016).
A Real-life Scenario
The managerial accounting concentrates on short-term accounting, which assists managers to deliver operational resolutions, which boost the organization’s operational and financial performance. For instance, any situation where a budget is required in decision-making is a suitable example of managerial accounting (Needles, Powers & Crosson, 2013). Such cases occur when Amazon Web Services leases its servers to an Internet organization. However, the accounting manager realizes that the renting charges of servers have been rising over the recent past. Therefore, the manager can utilize budgets to minimize the cost of hiring servers and improve operational performance. In case, the organization has a budget of $200 a week to rent the servers as compared to the expenditure of $400 a week. The manager understands that there is more than 100 percent difference between actual and budgeted finances, which is not healthy for the business (Nilsson & Stockenstrand, 2016). Subsequently, the managerial accounting is indicating to the managers to look for an alternative in other providers or raise their forecasts on prices.
Bettner, M., Williams, J., Haka, S., & Carcello, J. (2014). Financial & Managerial Accounting. Nelson Education.
Needles, B. E., Powers, M., & Crosson, S. V. (2013). Financial and managerial accounting. Cengage Learning.
Nilsson, F., & Stockenstrand, A. K. (2016). Financial Accounting and Management Control. Springer International Publishing: Imprint: Springer,.