- The place held by management accounting and financial accounting
- Environmental factors
- Analysis of Strengths, weaknesses, opportunities and threats
- Financial accounting and management accounting
- Differences & characteristics of financial accounting and management accounting in terms of content, structure, designation, frequency of generation, purpose and uses
- Role played by management and financial accounting originating from the output of these functions
Each organization is exposed to various features that determine its action plans regarding all functions. This set of factors is termed as the environment and its influence on the decision-making process of every organization is real. As a result, it is imperative that an organization understands the features of its environment in order to enable it structure its strategies in a form that substantially minimizes any adversities occurring because of the changes in the parameters of the environment.
Differences between Management and Financial Accounting
Both management and financial accounting are crucial functions in monitoring and managing the environmental factors of an organization. Although management account is fairly a new aspect, the purpose it serves is fundamental as well. The similarities, differences between management and financial accounting, the benefits and the limitations are the basis of this paper. As a result, the report will delve into how the functions complement and supplement each other in effective business management. By so doing, the report will outline the environmental factors catered for by the two forms of accounting.
Financial management is function of management where performance is depicted in terms of dollar value. All the operations and functions of the organization are cost centers as well as revenue generators. At the end of each period, the records of trading and revenue generation are displayed as financial statements. The contemporary financial controllers are basically supposed to display more than just financial results in the financial statement. At the end of each period, financial records are released to the stakeholders and this will hence enable them make decisions relating to investment among others. Stakeholders have a right to know the performance of the organization to enable them make a better decision. The stakeholders should be mainly classified as the owners and creditors. Owners are concerned about the level of the returns accruing to them while creditors are keen to gauge the safety of their lending (Epstein, & Manzoni, 2006). Thus, the financial records have to serve this purpose owing to the fact that the stakeholders are the providers of the finances invested. Management accounts on the other hand are mandated by the need of the management to gauge the status of the organization. As a result, management accounts are normally destined for top management, who has to keep planning and strategizing in order to achieve the objectives.
Financial statements should be prepared using standard and stipulated procedures and formats whose design and content characteristics are populated by the authorities. The main aim of standardizing financial records is to enable all the information necessary is included there in. such information is key to decision making by stakeholders (Carey & Essayyad, 1990). Disclosure levels, as they are termed, are aimed at protecting both the management and stakeholders in case of any claims regarding the contents of the financial statements. This fact necessitates accuracy, truth and fairness in the audited records that an organization publishes.
Management accounts should not be necessarily presented in a standard form. The features of management accounts vary from organization to the other. The difference in parameters considered in preparation of management accounting in addition to the designation contributes to the difference in format.
The difference in format is complimentary in achievement of specific functions. Since the financial statements are destined for a wider base of individuals, it is imperative that industry norms be developed. The stakeholders would like to be able to compare the performance of different companies and decide the most appropriate. Stakeholders are drawn from a wide base of academic and professional orientations. On the other hand, management accounts are destined to the management, who’s educational and professional qualifications enable them to grasp the brief aspects of management accounts.
Financial accounts are a display of the culmination of the trading period. As a result, the information contained therein should be related to the whole organization. Functions that directly or indirectly affect the trading process are therefore indicated in the financial records as required by disclosure rules. This enables all stakeholders to analyze the totality of characteristics of the organization before making any decisions. The accuracy of the information contained in the financial records is based on total disclosure thus no information is deemed unsuitable.
In the words of Emmanuel & Merchant (1990), management accounting on the other hand portrays information regarding aspects of the business, which the management deems worth focus. The management may request for information or analysis of one aspect of the environment for management accounting purposes whereas the financial records outline information regarding as many factors as possible. The boundary to disclosure regarding financial records is privacy of information.
Financial accounting is a mandatory and statutory function for each organization. Each company has to remit audited financial records to act as a basis for taxation among other things (Groppelli & Nikbakht, 2000). Thus, without financial records, the operations of a company are bound to become subject of scrutiny by the regulatory authorities. Stakeholders also use these records to make decisions. Without any tangible information, it becomes challenging to come up with any decisions regarding the viability of the company.
Management accounting serve a necessary function by providing management accounts (Chadwick, 1998 & Langfield-Smith, 2009). However since the users of these records are the management, this information is actually necessitated by administrative reasons more than statutory. An organization has to ensure that it avails financial statements in order to cater for statutory compliance and avail management accounts whose importance cannot be overemphasized.
Moyer, et al, (2005) implied that financial accounts are prepared on an annual basis. Each organization has to file returns with the authorities as well as post performance levels with the stakeholders in order to achieve any strategic plans through fostering expansion plans. As a result, the financial records of an organization are based on the performance of the company over the previous year. Dividend declaration, taxation and even expansion plans by an organization are carried out at the end of the year and all concerned individuals are fully aware of this (Banjerjee, 2005).
Thus, the authorities will not expect tax on profits to accrue to midyear. Some companies are fond of posting interim accounts as a means of keeping their stakeholders informed. Quarterly or half-yearly results are only meant to account as representative since the financial statements at the end of the year will determine the picture painted in the eyes of the stakeholders.
As outlined by Baker & Powell (2005), management accounts are however flexible in nature and are availed on request by the management. As a result, it is possible that management accounts take the form of a monthly or quarterly affair and sometimes-weekly portions are requested. The importance of the information required necessitates regular updates to the management. The internal environment of the organization is the most predictable ad thus the management requires ample, if not perfect knowledge of the internal environment. Without such information, it is impossible to be prepared to face the challenges posed by the external environment.
Drury (2008) was of the view that the information relating to budgets changes on a frequent basis thus necessitating frequent input of variables to cater from seasonal fluctuations in demand and supply or economic conditions. Similarly, changes in legislation relating to certain factors of the organizations necessitate instantaneous action and implementation procedures that cannot be catered for by the financial accounts. Hopwood & Chapman (2008) agrees that the entry of a new competitor during the year requires change in strategy and approach to customer service, which cannot wait until auditors certify the true and fair view of the financial records. Thus, management accounts are favored owing to their flexibility of application while financial records are recognized for their universality.
When a company releases its financial records, the stakeholders are not mandated to debate or comment on their accuracy or appropriateness. As a result, the feedback system regarding the financial accounts is non-existent. The stakeholders accept the accounts as they are and any inaccuracies are deemed misrepresentations, which are taken care of by authorities (Shim, 1998). Thus, the users of financial records are not able to influence the contents and only seek ways to receive contents that are favorable.
Management based on accounting is based on the search for the best course of action and are characterized by flexibility owing to a fluent feedback system (Atrill & McLaney, 1994). Thus, management accounts are taken back and forth between the management and accountants in a bid to find the most appropriate position for the organization to take. If simulated demand levels are not favorable, the management accountant seeks ways of finding a favorable position in which to achieve optimal returns (Baker & Powell, 2005).
Management accountants base their postulations on financial accounts while financial accounts borrow nothing from management accountants. This fact is due to the nature of management accounts that require some historical data to outline the projections for use. Consequently, organizations that have been in operation for long are most capable of utilizing management accounts. Carey & Essayyad (1990) proposes that while financial accounts have universally structures and base their information on tangible information which is sometimes tedious in handling to come up with precise information.
As a result, the management accountant is best armed with information from the past to determine the future while the financial accountant only requires the information relating to the previous period for his deductions. The above postulations serve to display the need for both financial and management accounting as tools of propping the functions of the business. The unpredictability of the environmental factors necessitates the institutions of measures to counter any changes in the environment.
Role of management & financial accounting within process
Organizations are constantly aware of the vitality of information for decision-making. Thus, most financial accounts include information strategically targeting certain stakeholder with the hope that the response will be positive to the business as asserted by Banjerjee (2005). For example, high profitability is a factor that enables an organization to attract funding in both equity and debt capital. Consequently, such information can be highlighted in the records as ‘strength’. The potential capital base is an ‘opportunity’ for growth and development.
The historical nature of financial records forms a basis for decision-making. Each organization uses its financial records on the operations and trading activities of the previous trading period. Thus, the data contained therein can be used to predict the future by considering the variables. This is actually what constituted management accounting. According to Atrill & McLaney (1994), management accountants rely on financial records to make deductions about the future.
As echoed by Chapman (2005), management accounting is defined as the use of professional skills in preparation of accounting information to aid the management in formulation of policies. Such information is key to planning and control of operations in which the organization is engaged in. the ability to integrate historical data and economic projections into models that are based on certain objectives enables management accountants to match objectives with the environmental factors.
Baker & Powell (2005) posits that both management and financial accounting complement one another on the objectives of an organization. The objectives of a firm are broadly defined as profit maximization and value or wealth maximization. Profit and wealth maximization both rely on the favorability of the environmental factors (Bhimani, 2003). The scarcity of resources available for generating resources necessitates efficiency in the use of resources. Efficient use of resources designates allocation of the right type of resources t the right destination and at the right time.
Over the years, management and financial accounting have become central to performance of an organization since the long-term performance is squared reliant on their characteristics (Moyer, et al, 2005). Success of a business is based on each step taken during its lifetime. Thus, the decisions made today have long-term effects and are differentiating factors for each business.
As each organization seeks to cut a niche in the market and obtain a market share the decisions they make carve their characteristics. Without careful analysis of the factors, the financial records will not serve the required functions and will be insufficient for use by stakeholders. Management will also not be able to make accurate decisions owing to the inappropriateness of the information contained therein.
All the information relating to the future and past of an organization operation is equally necessary for decision-making. The functions of management and financial accounting sometimes overlap but are destined for completely separate functions that are necessary functions for the stakeholders use. The necessity of this information makes it imperative to avail such information in order for the short-term success of the firm to culminate into long-term profit and wealth maximization in addition to any other objectives. Without the ample knowledge of the past provided by the financial accounts and that of the future as articulated by the management accounts, it become impossible to steer the organization towards the desired direction. This is because financial statements help to curb the external influences while management accounts aid to better control the internal functions.
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