Chapter 1, Problem 1.1Q

How does management accounting differ from financial accounting?

To determine

Financial accounting:

Under financial accounting, business transactions are measured and reported in the form of financial statements. Generally accepted accounting principles (GAAP) are followed while preparing the financial statements. The users of the financial statements are usually the external users, such as investors, banks, suppliers, and government agencies.

Financial Statements:

A financial statement is a complete record of the financial transactions that takes place in a company at a particular point of time. It provides important financial information like assets, liabilities, revenues and expenses of the company to its internal and external users. It helps them to know the exact financial position of the company.

Management accounting:

Management accounting measures, analyzes, and reports both financial and non-financial information. Such information helps managers to take effective decisions in order to attain the objectives of an organization. They not only help in planning the various activities of the organization but also in evaluating performance and taking corrective measures when there is a deviation from the charted path.

To state: The differences between management accounting and financial accounting.

Explanation of Solution

The differences between management accounting and financial accounting are as follows:

• Objective of the organization: The main purpose of management accounting is to help the managers in allocating the resources efficiently while the main purpose of financial accounting is to help the external users in allocating resources at their disposal.
• Primary users: The primary users of management accounting are the managers of the company itself. The primary users of financial accounting are the external users such as, investors, banks, regulators, and others who are external members of the organization.
• Focus and emphasis: Management accounting focuses and emphasizes on future-oriented activities, like budgets. Financial accounting focuses on the past performance of a company.
• Rules of measurement and reporting: The preparers of the management accounting reports have no obligation to follow GAAP, primarily driven by the cost-benefit analysis. The financial accounting reports are prepared strictly in accordance with GAAP and these statements are certified by external and independent auditors.
• Type of reports and time span: The time span of the management reports vary from hourly information to yearly plans ranging up to 15 to 20 years. These reports consist of both financial and non-financial data information and can be prepared product, department, territory, and strategy wise.
• Behavioral implications: Management accounting reports influence the behavior of the managers and other employees of the organization. The financial accounting not only reports the economic events but also influences the behavior as the managers compensation is often determined by the reported financial results.

Conclusion

Hence, the differences between management accounting and financial accounting are explained as above.