After reading the required background resources for this Module, compare and contrast financial accounting and managerial accounting. What are the purposes and the critical functions of each? Explain your answer in a 200-word summary, using peer-reviewed sources to support your explanations. Your posts will be graded on how well they meet the Discussion Requirements posted in the “Before You Begin” section”. Please review this section, as well as the discussion scoring rubric.
Financial accounting and managerial accounting are two branches of accounting that serve different purposes and fulfill distinct functions within an organization. To compare and contrast these two types of accounting, it is essential to understand their purposes and critical functions.
Financial accounting is concerned with the preparation of financial statements that are used for external reporting purposes. The primary objective of financial accounting is to provide relevant and reliable information to external stakeholders, such as investors, creditors, and regulatory authorities. These stakeholders rely on financial statements to make decisions about investing, lending, and regulating companies. Financial accounting follows generally accepted accounting principles (GAAP) and is subject to various regulations and standards that ensure the accuracy and transparency of financial reporting.
On the other hand, managerial accounting (also known as management accounting) is geared towards providing information to internal users, such as managers and executives, to support decision-making, planning, and control within an organization. The primary purpose of managerial accounting is to assist management in formulating and implementing strategies, evaluating performance, and optimizing resource allocation. Unlike financial accounting, managerial accounting does not have to adhere strictly to external reporting standards. Instead, it focuses on providing information that is relevant, timely, and tailored to the specific needs of management.
Critical functions of financial accounting include the preparation of financial statements, such as the balance sheet, income statement, and cash flow statement. These statements summarize the financial position, performance, and cash flows of an entity during a given period. Financial accounting also involves recording transactions, preparing journal entries, and maintaining ledgers, ensuring that financial information is accurately captured and reported.
In contrast, the critical functions of managerial accounting include budgeting, cost analysis, forecasting, and performance evaluation. Managerial accountants collect and analyze data related to costs, revenues, and other relevant factors to help managers make informed decisions. They may prepare budgets that allocate resources and set financial targets for different departments or projects. Cost analysis involves determining the costs associated with producing goods or services and identifying opportunities for cost reduction or efficiency improvement. Forecasting helps anticipate future trends, risks, and opportunities, allowing managers to develop effective strategies. Performance evaluation involves comparing actual results with budgeted or expected outcomes, helping managers assess performance and take corrective actions if necessary.
In summary, financial accounting primarily serves external stakeholders by providing reliable financial information for decision-making and regulatory purposes. It focuses on preparing financial statements and adheres to external reporting standards. Managerial accounting, on the other hand, caters to internal users and aims to support internal decision-making, planning, and control. It involves functions such as budgeting, cost analysis, forecasting, and performance evaluation. While financial accounting provides information about the past performance and financial position of a company, managerial accounting provides forward-looking information to aid in management decision-making. Both branches of accounting play crucial roles in the overall financial management of an organization, albeit with different emphases and target audiences.