Difference between Financial Accounting and Management Accounting

What are the differences between financial accounting and management accounting? Accounting plays a very important role in making decisions in the economic or financial system. The definition of accounting itself is an information system designed to measure business activities, process data into reports, to communicate the results to management.

The main role of accounting science is to assist management tasks, especially in the monitoring and planning functions. In general, accounting deals with financial matters to the activity of recording money.

However, in its application in the business world there are various types of accounting. Each has a different role and function. Some of the most common types of accounting known by the public are financial accounting and management accounting.

What are the differences between Financial Accounting and Management Accounting?

The basic difference between financial accounting and management accounting is the reporting orientation. In management accounting, reporting is oriented to internal parties, while financial accounting reports is oriented to external parties.

Management accounting is an accounting field that deals with reporting financial information for the company’s internal parties.

Internal parties, among others

  1. top level company management
  2. mid-level enterprise management
  3. first-rate enterprise management

On the other hand, financial accounting is a field of accounting that presents financial reporting addressed to external parties of the company.

External parties, among others

  1. Shareholders
  2. Creditor
  3. Government
  4. And other parties who are not directly involved in the operations of a company

The differences are not only in terms of reporting but also in terms of understanding, scope, benefits, and others. Whatever it is, let’s have a look.

Understanding Financial Accounting

Financial accounting is one type of accounting related to the preparation of financial statements for several outside parties, such as shareholders, suppliers, creditors, and other related parties.

The financial accounting system in general is intended to regulate various kinds of recording transactions carried out by companies or organizations to compile financial reports of transactions that occur during one management period.

Basically, financial accounting is described as a form of presenting a company’s financial statements to external parties, both in the form of balance sheets, income statements, changes in capital, to cash flows to shareholders, creditors, and investors. These matters relate specifically to the profitability and credibility of companies, suppliers, and the government.

Financial Accounting Objectives

The main function of financial accounting is to present financial information from an organization or company. The presentation of this information is generally made in the form of a report, so that related parties can see the financial condition of a company and everything that has happened in it.

Information about a company’s finances is needed, especially in management matters, because this can help make decisions, which in turn will influence and determine the state of the company going forward.

The details of the objectives of the application of this financial accounting, namely:

  • To provide reliable information about a change in the net economic resources of a company that can arise from a company’s activities in order to make a profit.
  • To present information about the activities, liabilities and capital owned by the company.
  • To assist the parties concerned in estimating a company’s potential in an effort to generate a profit.
  • Provide other important information, such as changes in the company’s economic resources and shopping activities.
  • To disclose other information related to other financial statements that are relevant in meeting the needs of the users of these financial statements.

Benefits of Financial Accounting

In addition to having general and special functions, financial accounting has its own role and benefits for the parties concerned. The parties in question include shareholders, investors, creditors, suppliers, and the government.

Well, here are some of the benefits of financial accounting for the parties concerned. Among them:

  • For shareholders, financial accounting can be information that allows them to assess the company’s ability to pay dividends.
  • Because investment includes quite prone to risk in this area, the investor would require financial data information to assess whether the invested funds is feasible ( Feasible) or not.
  • As information for creditors to assess a company’s ability to pay service fees and repay principal debts when they fall due.
  • As information for suppliers to assess whether the sales bill given will be paid by the company when it is due.
  • For information regarding the determination of tax policies and statistical data on national income by the government.

Financial Accounting Report Users

Users of financial accounting reports do not only include company parties. However, there are several other parties who are also users of this financial accounting report.

The following are users of financial accounting reports described in more detail:

  • Investors
    Investors or shareholders of course need information in an effort to determine whether an investment is worth giving or not. Considering that investors are quite risky activities in this field. Investors also need information that allows them to assess the company’s ability to pay dividends. Such information can be obtained from the details of existing financial accounting reports.
  • Employees
    Employees need information about the stability and profitability of the company. This relates to the way they assess a company’s ability to provide remuneration, post-employment benefits, and other employment opportunities.
  • Lenders
    Financial accounting reports can be used by lenders to decide whether existing loans and interest can be paid when they fall due.
  • Suppliers and other business creditors
    Financial statements are used by this group to obtain information that enables them to decide whether amounts owed will be paid as they fall due.
  • Customers The
    customers referred to here are interested parties and are involved in long-term agreements or depend on the company.
  • Government The
    government and its subordinates need information to regulate company activities, determine tax policies, and as a basis for the preparation of national income statistics and other statistics.
  • Society The
    community can be helped in seeing the trend and the latest developments in the prosperity of the company and its series of activities through the financial accounting reports of a company.

Scope of Financial Accounting

Broadly speaking, the report of financial accounting presents financial information of a company as a whole, starting from the balance sheet (statement of financial position) which presents assets, income statement which presents the results of activities of the company as a whole, liabilities (liabilities), capital, cash flows. and others.

Because the purpose of financial statements is used by parties outside the company, in general the information contained in the report is in the form of a summary while still describing the company’s overall financial condition.

Financial Accounting Timeline

Financial accounting reports based on the time span are less flexible. In addition, the period only covers certain periods, such as an annual period (annual) , half a year (interim) , a period of one quarter, or a period of one month.

Financial Accounting Information Focus

The focus of financial accounting information is centered on past information. The focus of the information as a whole can provide an overview of the form of management accountability of a company for the management of its company funds.

Types of Financial Accounting Information

Financial accounting basically only measures financial management data based on the applicable Financial Accounting Standards (SAK).

This is quite different from management accounting which does not only measure finance and operations, but also includes information on physical measurements of processes, suppliers , technology, competitors, and also customers.

Nature of Financial Accounting Information

The nature of information from financial accounting can be described in a high level of accuracy, objective, accurate, and can be verified. This is because the users are parties from outside the company who use these financial statements as consideration in making decisions.

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