Management Accounting Principles and Effective Planning Tools for Managing Accounts
From the management accounting viewpoint of business, the process of decision-making is the main aim of management accounting. The way of how accountants make their decisions has been studied and investigated widely. It is very helpful in management accounting to categorize decisions in to strategic and tactical and in to short run and long run decisions. The objective of management accounting is to make a good decision as the process of management decision-making is extremely subjective. A good decision is depends on the aims and purposes of management.
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.
The core purpose of managerial accounting is to provide information that is vital in enhancing decision-making. It is the duty of managerial accountants to make decisions based on making choices between two alternative products. For example, a managerial accountant of a given company that specializes in the manufacture of goods must make decisions on which product, if produced, will create profit for the organization. Additionally, the manager must make a decision on the price to charge customers so that it can reflect value for their money. However, the decision on the price of a product will mainly depend on the cost of production. In addition to that, managerial accounting employs cost analysis technique that embraces variable and fixed costs to acquire information. As such, the final decision on a given product usually reflects the information received by the managerial accountants (Warfield, et al, 2012). The financial market is one of the most fundamental aspects of that a company should give due weight before making short-term decisions. Primarily, the rate of interests that are charged by financial institutions is the primary factor that has a bearing in decision-making processes in business. As such, a company should carry out an analysis of the current and future trends in financial markets before borrowing money from financial institutions. For instance, a company should ensure that the interest rate on the money that it borrows does not negatively impact on the current and future operations of the business. Therefore, it is fundamental that a company predicts the financial market outlook and only take loans that it can be able to pay within the agreed period. If the business fails to meet its financial obligations, then it is likely to face additional financial expenses such as charges on default payments or an additional loan to repay the earlier one, an aspect that may be strenuous to the financial capability of the organization (Nordhaus, 2010).
To conclude, additional differences that are not mentioned in the discussion above include the fact that in financial accounting, management should be concerned about the sufficiency of disclosure in statements while in management accounting, the management should be worried about the effects the management reports are bound to have on employees and the organization as a whole. Therefore, management accounting and financial accounting are very different.
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Nordhaus, W. D. (2010). The political business cycle. The review of economic studies, 42(2), 169-190.
Warfield, T. D., Wild, J. J., & Wild, K. L. (2012). Managerial ownership, accounting choices, and informativeness of earnings. Journal of accounting and economics, 20(1), 61-91.