What is Financial Accounting?
The practise of recording, summarising, and reporting a company's financial transactions to external parties including investors, creditors, and regulatory agencies is known as financial accounting.
Giving these stakeholders relevant, trustworthy, and clear financial information is the main goal of financial accounting. The rules and procedures for the compilation of financial statements are provided by generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS).
The balance sheet, income statement, and cash flow statement are the three primary financial statements created in financial accounting. The income statement reflects on the firm's revenue and costs over time, the cash flow statement demonstrates how the company makes and spends cash, and the balance sheet gives a snapshot of a company's financial situation at a certain point in time.
Financial accounting is important because it helps stakeholders to evaluate a company's financial standing and make wise investment or credit decisions.
Primary Functions of Financial Accounting:
The main functions of financial accounting are to record, summarize, and report a company's financial transactions and position to external stakeholders. Here are the key functions of financial accounting:
- Recording Transactions: Financial accounting involves recording all financial transactions in a systematic manner using a double-entry accounting system. This means that for every transaction recorded, there is a corresponding debit and credit entry in the accounts.
- Summarizing Transactions: Once transactions are recorded, they are then summarized into financial statements such as the income statement, balance sheet, and cash flow statement. These statements provide a summary of a company's financial performance and position over a specific period.
- Reporting: Financial accounting involves preparing and presenting financial statements to external stakeholders, such as investors, creditors, and regulatory bodies. The financial statements must comply with generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS) to ensure consistency and comparability.
- Interpretation: Financial accounting provides information that can be used to interpret a company's financial position and performance. This information is useful to external stakeholders who rely on it to make informed decisions about their investments or credit decisions.
- Compliance: Financial accounting ensures that a company complies with legal and regulatory requirements related to financial reporting. Failure to comply with these requirements can result in penalties, fines, or legal action.
What is Management Accounting?
Management accounting is a branch of accounting that involves giving financial information to internal stakeholders, like as managers and executives, to help their decision-making processes. The main goal of management accounting is to support managers in making strategic business choices that enhance the productivity and profitability of the organisation.
Management accounting is focused on giving information to internal stakeholders as opposed to financial accounting, which is focused on giving financial information to external stakeholders. Management accountants collaborate closely with managers and executives to deliver pertinent financial data that supports their decision-making.
Also, read; Management Accounting: Definition, Goals, Methods, and Scopes
Primary Functions of Management Accounting:
- Costing: Management accounting involves analyzing and calculating the costs of products, services, and activities. This information is useful to managers in making decisions related to pricing, production, and resource allocation.
- Budgeting: Management accounting involves preparing budgets and forecasts to help managers plan and control their activities. Budgets help managers set targets, monitor performance, and identify areas for improvement.
- Performance Measurement: Management accounting involves measuring and evaluating the performance of departments, products, and services. This information is useful to managers in assessing their performance against targets and identifying areas for improvement.
- Decision Making: Management accounting provides managers with financial information that is relevant to their decision-making processes. This information is used to evaluate investment opportunities, make strategic decisions, and identify areas for improvement.
Difference Between Financial Accounting vs. Management Accounting:
Financial accounting and management accounting are both branches of accounting that serve different purposes and audiences.
Here are the key differences between Financial Accounting vs. Management Accounting:
- Purpose: Financial accounting provides information about a company's financial performance and position to external stakeholders, such as investors, creditors, and regulatory bodies. Management accounting, on the other hand, provides information to internal stakeholders, such as managers and executives, to help them make better business decisions.
- Scope: Financial accounting is concerned with recording and summarizing financial transactions, preparing financial statements, and complying with accounting standards and regulations. Management accounting is concerned with providing information for planning, controlling, and evaluating the performance of a company's operations.
- Timeframe: Financial accounting provides information on a company's financial performance over a specific period, such as a fiscal year. Management accounting, however, provides information on an ongoing basis, as needed by managers to make decisions.
- Reporting: Financial accounting reports are standardized and are required to follow generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS). Management accounting reports are tailored to the needs of the managers who receive them.
- Audience: The primary audience for financial accounting is external stakeholders, such as investors, creditors, and regulatory bodies. The primary audience for management accounting is internal stakeholders, such as managers and executives.
Overall, Financial Accounting and Management Accounting serve different purposes and audiences, but both are important for a company’s success. While financial accounting provides a snapshot of a company’s financial position, management accounting provides the information needed to make informed decisions to improve the company’s financial performance overtime.
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