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Financial and Management Accounting: The Contribution to Effective Business and Management

Financial and Management Accounting: The Contribution to Effective Business and Management


The traditional accounting is concerned with rules based accounting methods that incorporate financial measures for reporting purposes (Elias, 2002). The evolution of management accounting has gained momentum in the recent decades due to the failure of the traditional accounting techniques to offer futuristic and non-financial measures to support business decision-making (Page, 2000). The role of management accountants is becoming increasingly important in the global business environment as the development of information technology has offered accountants with the capability to generate financial and non-financial information for the aiding business decisions (Shotter, 2001). This essay critically evaluates the literature offering insight into the issues and the role of financial and management accounting in business environment.Discussion

Financial accounting and managerial accounting are developed using the same basic financial data and economic information. However, their major differences begin with the fact that financial accounting is prepared for external audiences to the company, including investors and creditors. Managerial accounting is prepared for use in financial decision-making by company management.

Financial accounting is governed by a strict set of rules. In the United States, those rules are the generally accepted accounting principles, or GAAP. Often, a company will use an external, independent accountant to review its financial accounting to ensure that it is in compliance with GAAP.

Managerial accounting is not governed by GAAP. Instead, each company can theoretically use its own systems for managerial accounting, which may be as strict or as relaxed as needed. While there is no required set of managerial accounting principles, many companies will use similar principles simply because it is easier than creating an entirely new system.

Internal decision-making will often require a consideration of certain financial aspects of a company's performance. Generally, these will be very specific to a particular project or initiative. Additionally, the accounting needed to make internal decisions can sometimes be relatively flexible and may involve many estimates and assumptions that would not be appropriate for external financial statements. For these reasons, managerial accounting is almost always used for internal decision-making.

Particularly for public companies, they must create external financial reports regularly for use by creditors, investors and government regulators. Because such outside parties are not involved with the companies they may be examining on a regular basis, they often require more specific and detailed information than internal decision-makers. Additionally, government regulators require that most external financial statements comply with GAAP. Therefore, financial accounting is virtually exclusively used for external financial reporting.

While there are few situations in which both managerial accounting and financial accounting would be used in conjunction, it is possible that accountants may use both systems for the same accounting activity if the information being sought is relevant for both internal and external parties; however, it is more likely that in such a situation, internal decision-makers would simply use the external financial reports for internal purposes.

The Role of Management Accounting in a Business Environment

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