Financial Accounting and Management Accounting
Financial accounting is the preparation and presentation of financial information for all types of users to enable them to make economic decisions regarding the entity. General purpose financial statements (GPFS) are prepared to meet the information needs common to users who are unable to command reports to suit their own needs, while special purpose financial statements are prepared to suit a specific purpose and do not cater for the generalised needs common to most users. This information is governed by the generally accepted accounting principles (GAAP), which provide accounting standards for preparing financial statements. Financial accounting is also guided by rules set out in the Corporations Act and the Listing Rules of the Australian Securities Exchange (ASX). Financial accounting is traditionally based on historical figures that stem from the original transaction; for example, the purchase of a building for $500 000 would be shown in the financial statement (the statement of financial position) as an asset of $500 000. Even though the $500 000 may not reflect the current market value of the building, the building is still shown at its historical cost, which is the original amount paid for the asset.
The financial statements consist of the entity’s statement of cash flows, statement of financial position and statement of profit or loss (for companies, the statement of profit or loss and other comprehensive income and the statement of changes in equity). The statement of cash flows reports on an entity’s cash inflows and cash outflows, which are classified into operating, investing and financing activities. The statement of profit or loss reflects the profit for the entity for a specified time period. (Profit is the excess of income over expenses for a period.) An entity’s assets and its liabilities at a point in time are reported in the statement of financial position. Financial statements will suit a variety of different users, such as the management of the entity, investors, suppliers, consumers, banks, employees, government bodies and regulatory authorities.
Management accounting is a field of accounting that provides economic information for internal users, that is, owner(s) and management. The core activities of management accounting include formulating plans and budgets, and providing information to be used in the monitoring and control of different parts of an entity. Management accounting reports are bound by few rules and are therefore less formal. Because management accounting reports are prepared for and tailored to suit the needs of management, they can provide any level of detail. For example, if the human resources manager requires information on the number of employees who have opted to make additional superannuation contributions, then a report can be produced. Management accounting reports must be up to date and can be prepared at any time for any period. For example, a sales manager in the entity may demand information on the current day’s sales by the end of that day.
Ultimately there will be an interaction between financial accounting and management accounting, because management accounting will provide economic information for internal users that is then reflected in the financial accounting statements for external users. One such example of the interaction between financial and management accounting is in the area of segment reporting by large and diversified companies. Large and diversified companies must disclose segment information as part of their accompanying notes to their financial statements. Reporting on segments assists users in helping to understand an entity’s relative risks and returns of individual segments of the entity. The operating segments are reported according to how an entity is organised and managed, and hence this is known as the management approach. Therefore, management accounting determines the operating segments and financial accounting reports these operating segments to the various users of financial statements.
- Birt J., et al. (2020). Accounting: Business Reporting for Decision Making 7th John Wiley & Sons Australia, Ltd.
- Google Image. (2021)