by Peter Baskerville

Created on: January 07, 2009   Last Updated: January 12, 2009

There are many different groups of people (stakeholders), like governments, investors, labor unions, employees, banks and operational managers who each have an interest in the financial performance of an organisation. They would each prefer, if possible, a customised report dealing only with their area of concern. Since this is not feasible, accountants have instead attempted to meet these divergent needs by created two branches of financial information reporting, split generally along the lines of external and internal users.

(1) FINANCIAL accounting prepares highly regulated reports for external stakeholders who are not engaged in the day to day operations of the organisation. and (2) MANAGEMENT accounting provides customised, appropriate and timely financial information to those internal managers entrusted with the day to day operations of the organisation.

Financial accounting then, prepares financial information for stakeholders like Government agencies, Lenders, Investors (Owners), Creditors, Suppliers, Customers, Trade associations and society at large whilst management accounting provides it for stakeholders like a Board of directors, Chief executive officer (CEO), entrepreneurs, Chief financial officer (CFO) , Vice presidents, employees and Line managers like Business unit managers, Plant & Store managers.

Now whilst the reporting styles in each branch are vastly different, the underlying objective is the same - to satisfy the information needs of the user.

Describing these two accounting and reporting approaches further:

FINANCIAL ACCOUNTING Financial accounting is focused on producing a limited set of time regulated and specific prescribed financial statements in accordance with generally accepted accounting principles (GAAP), that are set by peak accounting bodies in conjunction with government agencies. The central outputs from financial accounting are audited financial statements such as the Balance Sheet and Income Statement that provides a scorecard by which a company's overall past performance can be judged by outsiders.

The emphasis in financial accounting is on producing organisational summaries of financial consequences of past activities and decisions. The prepared data is objective, precise and verifiable, usually by an external 'auditor'. The numbers used in financial accounting are generally highly conservative in nature. An even more specialised area of financial accounting would be Tax Accounting.

MANAGEMENT ACCOUNTING Managerial accounting

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