Let me start by considering the very nature of accounting. Accounting is a routine process of systematization business transactions recorded in the primary documents with the double purpose: a) to control the presence, movement and rational use of assets, timely execution of its obligations to suppliers and contractors, financial and credit agencies, etc., and b) forming data to make internal and external reporting. According to the last statement, there are two kinds of accounting: financial and managerial ones. To begin with, let us understand what a difference between them is. In order to make a full comparison, it would be better to use some features.
The first thing that needs to be said is that these kinds of accounting differ for the purpose they are prepared for. The finance accounting report is made in order to show reliable information about the financial condition of the company and the results its activities. On the other hand, the aim of managerial accounting report is a preparation of timely information on the activities of the company as a whole and its individual departments for planning, control, and decision-making at different levels of management.
The second attribute that distinguishes these types of accounting are users of its results. Financial accounting is prepared for external users, for instance, shareholders, investors, tax agencies, public organizations, trade unions, creditors etc. Managerial accounting reports are made for internal users, for example, entrepreneurs, managers if different levels and departments that are not engaged in the daily management of a company.
What concerns the legal requirements; the financial report is prepared according to the Generally Accepted Accounting Principles in order to assure external users that provided documents are made amenable to the unique rules. The managerial report may be done with the use of any rules depending on its utility for efficient management.
The financial reports are aimed in the past as they provide some kind of retrospective evaluation of company activities. In contrast to the financial report, managerial one is directed in the future, as it is something like forecast based on the past facts.
Another important issue is the publicity of information in those reports. The vast majority of data taken from the financial accounting report is in the open access. On the other hand, the information from managerial accounting report is the commercial secret.
It is clear from these observations that, preparing the financial report is compulsory activity in the company because there is a need of constant and full providing the necessary data to the users. While managerial reports are not obligatory. Decision to conduct it is taken by management and is based on the possible introduction of management accounting and expenses connected with its preparing.
In the financial reports could be used only money as a unit of measurement. Furthermore, the managerial report could include of any units of measurement, for instance, labor and natural, as well. The essential object of analysis in financial accounting report is an economic unit as a whole which is considered as a subsystem, that operates within the national economic space. In the managerial report, company in addition to this shows as individual segments, organizational units, products and markets.
Another issue that should be mentioned is periodicity if preparing these kinds of reports. Financial report are prepared either annually (for more ought reports), and quarterly (less detailed report) while for management reporting intervals are variable.
Last but not least is the responsibility for preparing these reports. Probability of prosecution under the law is small but still exists as improper conducting of accounting distorts financial statements. While management accounting is only an information tool for decision-making, for the correctness and effectiveness of which managers are responsible.
This paper is a combination of different attitude on the differences between financial and managerial accounting. However, there still is a necessity of understanding the practical side of any of them. That is why, in order to meet this target it would be better to provide some example.
It has been mentioned above that one of the purposes of financial accounting is to provide information about the company to the shareholders. Let us take some Investor who has a deep willing to invest his money in a profitable company. He has two different variants: Oil Company or metallurgical works. However, the Investor has some doubts because he wants to gain a high level of profit. That is why he starts to analyze the financial accounting reports of both companies in order to put an end to all his doubts. The Investor should pay proper attention to the relation between the changes of stock prices and net income for the last years. It is likely that the Investor will choose the company net income of which has increased in a higher rate, suppose it is Oil Company.
A closer look at the data indicates that these two types of accounting have some common features. For example, all subsystems of accounting are based on unique information, because of which the transformation of data is made according to user queries, as well as the timing, scope and forms of information. In this collection of primary data for all types of accounting performed by the same rules, thus avoiding duplication of data and thereby increase the efficiency of information for management needs. Based on the available evidence, it seems logical to suggest that there is a need for a company to use both types of accounting in order to secure efficient decision-making by either internal users or external ones.