There are two main branches of accounting. These are Financial Accounting and Managerial Accounting. The two types of accounting have a number of similarities and considerably numerous differences. The following paragraphs compare and contrast the two types of accounting using the subject-by-subject comparison structure.
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Financial accounting refers to the type of accounting that deals with preparation of financial statements, using accounting techniques, for financial reporting. The main purpose of financial accounting is financial reporting which is a statutory requirement for companies. Thus companies must prepare financial account annually in order to satisfy the statutory requirement.
From this fact, it can be deduced that financial accounts are prepared for use by external parties who include the government, shareholders, etc. Due to the stated fact, financial accounts are subject to independent audits to ensure that the information presented in the accounts is true and fair. This is meant to protect the parties who use financial accounts from being deceived by misrepresentation of the accounts.
The practice of financial accounting utilizes historical data which is computed and reported to the concerned parties. Another very important aspect of financial accounting is the fact that financial accounting is governed by a regulatory body that ensures that standards are kept. The main concern by management regarding financial accounting is the possible inaccuracy of information in financial statements and the possible inadequacy of disclosure of financial information.
Financial accounting is instrumental in summarizing the efficiency and effectiveness of the whole business enterprise using a set of financial accounts. Both financial accounting and financial reporting use currencies, accounting techniques and accounting terminology to achieve their objectives.
Managerial accounting refers to the analysis of the information of an enterprise, using accounting techniques, for the purpose of planning on how to achieve the goals of an organization. It is thus apparent from this definition that results from managerial accounting are used within the organization and they are not meant for external use.
They are usually prepared for use by managers in making decisions. It can also be deduced from the definition that the primary purpose of managerial accounting is planning. Managerial accounts are not subject to audits since their preparation lacks motivations for manipulation. However, an organization may decide to audit its managerial accounts if it so desires. Management accounting does not deal with historical data alone but it analyses present current data or makes predictions of future data for effective future planning.
Contrary to the aforementioned requirement for financial statements to be prepared annually, management accounts do not have provisions for the time they should be prepared. An organization, therefore, prepares management accounts when it its management feels that there is need for their preparation. In managerial accounting, the management may be worried about how employees will react to managerial reports.
Managerial accounting segments the enterprise into its various functional parts and analyses information related to each independently in order to gauge the profitability of each of the parts. This makes it easier for managers to know which parts of the organization need to be worked on. Management accounting and reporting uses currencies, accounting techniques and accounting terminology to achieve its objectives.
Conclusively, financial accounting and management accounting are very important in the running of businesses. They are both aimed at having positive impacts on the profitability of businesses.