Essay on Management Accounting

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Pages: 15

Financial and Managerial Accounting

Fabio Flórez-Fonseca



To beginning it is necessary understand what are Management Accounting and Financial Accounting. Management accounting is a field of accounting that analyzes and provides cost information to the internal management for the purposes of planning, controlling and decision making. Management accounting refers to accounting information developed for managers within an organization. CIMA (Chartered Institute of Management Accountants) defines Management accounting as “Management Accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of information that used by management to plan, evaluate, and control within an entity and to assure appropriate use of an accountability for its resources.” (Holt, M. 2009). This is the phase of accounting concerned with providing information to managers for use in planning and controlling operations and in decision making. Managerial accounting is concerned with providing information to managers i.e. people inside an organization who direct and control its operations. In contrast,

Managerial accounting provides accounting information to managers who are inside an organization and who directs and controls its operations, to help them make decisions to manage the business. For example, it provides information on the costs of an organization’s products and services, which managers can use products cost to guide the setting of selling prices, and use services cost to make inventory valuation and income determination. It provides information on the budgets and performance reports. These reports often consist of comparisons of budgets with actual results. It also provides information on revenues of an organization’s products and services, sales back logs, unit quantities and demands on capacity resources, which assist managers in their planning and control activities. (Managerial Accounting, 2008).

Financial accounting is concerned with providing information to stockholders, creditors, and others who are outside an organization. Managerial accounting provides the essential data with which organizations are actually run. Financial accounting provides the scorecard by which a company’s past performance is judged. Financial accounting is used to prepare accounting information for people outside the organization or not involved in the day to day running of the company. The primary objectives of financial accounting are to provide information that is useful in making investment and credit decisions; in assessing the amount, timing, and uncertainty of future cash flows; and in learning about the enterprise's economic resources, claims to resources, and changes in claims to resources. “Some of the most important information that financial accounting provides are: it is a means to an end, it is historical in nature, it results from inexact and approximate measures of business activity, and it is based on a general-purpose assumption.” (McGraw Hill online learning center).

Because it is manager oriented, any study of managerial accounting must be preceded by some understanding of what managers do, the information managers need, and the general business environment. The differences between management accounting and financial accounting include: 1. Management accounting provides information to people within an organization while financial accounting is mainly for those outside it, such as shareholders 2. Financial accounting is required by law while management accounting is not. Specific standards and formats may be required for statutory accounts such as in the I.A.S International Accounting Standard within Europe. 3. Financial accounting covers the entire organization while management accounting may be concerned with particular products or cost centers. Managerial accounting is used primarily by those within a