Differences Between Financial Accounting and Management Accounting

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Introduction

The purpose of this report is to discuss principles of and similarities and differences between financial and management accounting and to highlight how management accounting could be used to improve TVD’s performance. In particular, one of the management accounting techniques, benchmarking, is used as an example of how MA can help a business to run successfully.

Today, accounting is an important aspect of business. The primary idea is to present financial and non-financial information so that the company can make good decisions and succeed financially. In other words, for a business or organisation to be able to communicate and exist there is a demand of accounting.

There are two main types of accounting: financial accounting and management accounting.

Purpose of financial accounting

The main purpose of financial accounting is to record and summarize all transactions made over a particular period of time (usually a year) and to arrange these facts into a financial statement that can be communicated and analyzed. This information plays an important role for shareholders, who want to know how the business is performing and whether it makes profit or loss. The financial accounting is also of interest to other external users who are interested in organization’s performance, such as creditors, banks, potential investors, customers, tax inspectors and employees.

Purpose of management accounting

In contrast, management accounting is used for internal control, for example: planning, forecasting, performance measurement and decision-making. In other words, management accounting provides information for people inside the organisation, e.g. managers, to help them control the business and make decisions for the future.

Similarities between financial and management accounting

Although there is a difference in the type of information presented, financial and management accounting have some common characteristics. According to Upchurch (2002, pp. 25) “they are both predominantly quantitative, they share certain data sources, there is limited common usage, they are key elements in the Management Information System (MIS) and may be integrated”.

Differences between financial accounting and management accounting

However, there are also a number of differences in the preparation and use of the two types of accounting.

There is a legal requirement to produce annual financial information taken from the organisation’s financial accounting records, whereas management accounting information is collected for the advantage of the company and is not strictly a necessity. In addition, financial accounts are required by law to follow the Generally Accepted Accounting Principles (GAAP). These principles “are set by professional bodies in each country such as the Accounting Standards Board (ASB) in the UK, Financial Accounting Standards Boards (FASB) in the USA and International Accounting Standards Board” (Drury, 2004, p.7). The purpose of these principles is to ensure that external users can trust that the provided information is correct and complete. On the other hand, there is no legal requirement for management accounting to follow the GAAP, since the information is only for internal users who have greater opportunity to ensure themselves of the reliability of the information.

The advantage of not being bound to the GAAP is that management accounting can be adapted to the organisation’s needs. While financial accounting results in annual or quarterly reports, management accounting can provide information whenever it is required, for example daily, weekly or monthly. In addition, financial accounting usually concentrates on the company as a single unit. Management accounting can give attention to specific areas of an organisation’s activities, for instance to separate business locations or individual products.

A final difference is that while financial accounting is concerned only with what has...
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