Introduction
Accounting as a profession has really developed over the years. According to Hendriksen (1977), accounting records concepts can be traced as far back as the Roman and Greek periods. And like other professions, such as legal or medical profession, practitioners with time, have tended to focus on specialized fields to better serve the needs of users of accounting information and organizations. The specialized fields of accounting include financial accounting, management accounting, taxation, auditing, costing, among others. Each specialized field is important and serves a particular purpose. Although generally speaking, when mention is made of accounting, it is assumed that financial accounting is being referred to, but today, the field of accounting has become so diverse that it is pertinent to properly differentiate the areas of interest.
Accounting according to Niswonger and Fess (1961:1) is concerned with the process of recording, sorting and summarizing data resulting from business transactions and events, to satisfy the needs of interested parties such as management and shareholders. The data are to a large extent but not exclusively of financial nature, and are frequently but not always stated in monetary terms. This definition can be said to refer to both financial and management accounting, the two fields of accounting that dominate the profession.
Financial accounting is prepared to cover an economic unit or business. Financial accounting among other things is used to determine the profitability of an organization (trading, profit and loss account or income and expenditure account); and to determine its financial state as at a particular date (balance sheet). Although, a general knowledge of financial accounting is needed before specialization in any of the other fields can be achieved.
Managerial accounting is concerned with providing information to managers- that is, to those who are inside an organization and who direct and control its operations (Garrison and Noreen, 1999). It employs historical and estimated data to assist management in day to day operations and in planning for future operations. It identifies specific problems and tries to find solutions or alternatives to those problems. Problems such as CVP analysis, which examines the behaviour of total revenue, total costs, and operating income as changes occur in the output level, selling price, variable cost per unit or the fixed cost of a product. In essence, management accounting helps management in decision making. Although, Horngren, Datar and Foster (2006), stated that there is no clear distinction between management accounting and cost accounting, hence the two terms are often used interchangeably.
Similarities
Other than both being specialized areas of accounting, several similarities exist between financial and management accounting, which include:
Both utilize data from economic events such as receivables, payments, sales, and process the data into information in the form that will be useful to managers in making decisions with regards to their duties and responsibilities. The basic thing is that both satisfy the information needs of the users.
Both are used to measure performance of managers. Financial accounting focuses more on the organization as a whole, while management accounting looks at units or parts of the organization, such as operations or sales departments. Which ever way it is looked at, both financial accounting and management accounting are used to gauge the performance of managers. Financial accounts report on the performance of the business over a specified period, while management accounts through its projections can be used to gauged the performance of managers.
Both employ currency as the unit of measurements. Although, management account will at times focus on the number of units of goods produced, but eventually, such units will be converted to a monetary unit so that accurate comparison can be made between one period and the other, or between two departments.
Differences
As similarities exist so also differences exists. The major differences can be explained as follows:
The major focus of financial accounting is to provide information to organizations and institutions outside the organization, institutions such as banks, regulatory authorities, shareholders etc. This information is used to adjudge the performance of the organization. While management accounting is used to provide information to managers and others inside the organization for more efficient performance of their duties. Management accounting, in this sense can be considered confidential, as its usage does not go outside the organization, and even inside the organization, there are restrictions as to who has access to the information contained in management accounts.
Another related point to the one above is the users of the information generated. Financial accounting information is primarily used by external users, while managers in the organization are the users of management accounting. Although, as a rule, there are certain information that must be included in the financial accounts, management accounts don't require any specific information, the needs of the preparing organization are the basic requirements.
In preparing financial accounting statements, there are certain specified rules that must be followed. Firstly, it must be in accordance with Generally Accepted Accounting Principles, which encompasses accounting principles and conventions. Secondly, after its preparation an independent auditor has to be appointed to audit the accounts in order to certify that it is prepared in accordance with GAAP. Management accounting is specifically tailored to the needs of each firm and organization. Organizations prepare management accounts to meet up with their specific needs which invariably lead to the attainment of their objectives. Also, by law, incorporated companies are required to publish their statement of accounts annually, so it can be said that financial accounts is a legal requirement, while, preparation of management accounts is at the discretion of management.
Financial accounting information are usually prepared for year ending, although, half yearly, and quarterly accounting statements are sometimes prepared by organizations to meet with specific requirements. Management accounts are prepared from one hour to as long as the organization can be able to project into its future. If the organization carries out long term planning for periods of 15 years or more, then, it can also prepare management accounts for such a period.
Financial accounting focuses on economic events, such as receipts and payments, purchases and sales etc., management accounting while making projections does not base only on economic events, but considers peoples' attitudes in the organization, because it is mainly designed to influence behaviour of managers within an organization.
Financial accounting use a monetary unit as a standard of reporting, while management accounts uses several units as its standard of reporting, such as, man hours of production, sales quantity, machine hours etc.
Financial accounting is prepared from past or historical data, in other words, it is past oriented and reports past activities of the organization. Management accounting is also prepared from past data, but its focus is on future activities of the organization.
Conclusion
Financial and management accounts, are very important in every organization which aims to achieve its raison d' etre. While financial accounts are legal requirements and must be prepared in a specific format to meet GAAP, management accounts are prepared at the discretion of the organization, without any specific format, but with the sole aim of achieving the objectives of the organization.
References
Hendriksen, E. S. (1977) Accounting Theory, Illinois: Richard D. Irwin Inc.
Horngren, C. T., Datar, S. M., and Foster, G. (2006) Cost Accounting A Managerial Emphasis, 12th ed. New Jersey: Pearson Education, Inc.
Garrison, R. H., and Noreen, P. E. (1999) Managerial Accounting, Irwin McGraw Hill.
Niswonger, C. R. and Fess, P. E. (1996) Accounting Principles, 19th ed. Dallas, USA: South Western Publication Co. in Akpakpan, B. A. (2002) Accounting for Beginners: An Introduction to Financial Accounting. Kaduna, Nigeria: Abaam Publishing Co.