by Tess Boardman

Created on: June 23, 2010

Accounting is a broad field that encompasses various recording and reporting duties. Two different areas include financial accounting and management accounting and each has its differences. The purposes of reports, the end users of the information, and the legal standards vary.

*Financial Accounting

Financial accounting targets external end users such as stockholders, creditors, and regulators and produces classified financial statements on a quarterly and annual basis. These reports give financial information based on prior periods in a condensed, summarized format. These reports will be used by stakeholders to make stock purchase decisions, lending decisions, and determine taxing and regulatory compliance. The reports must follow GAAP, or Generally Accepted Accounting Principals, and are subjected to an external audit by a CPA, typically on an annual basis.

The standard reports prepared for financial accounting are:

Income Statement- This report shows the revenues, expenses, gross profit and net income of the business for a specific period of time.

Statement of Owners’ Equity – The net income from the income statement flows to the statement of owners’ equity and also shows additional investment or withdrawals of equity by the owners. This gives a balance of the owners’ equity in the business at the end of the reporting period.

Balance Sheet – The balance sheet gives a snapshot of a company’s assets, liabilities, and owners’ equity at a specific moment in time. The balance of the owners’ equity flows from the statement of owners’ equity to the balance sheet.

Statement of Cash Flows – This statement shows the sources of cash, how it was used, and changes in the cash account balance for the period.

Statements will include disclosures and notes that are pertinent to the reports as determined by GAAP. Items such as changes in accounting procedures need to be disclosed in the reporting process.

*Management Accounting

Managerial accounting, also known as management or cost accounting, is a system of internal reports designed for officers, owners, department heads, and managers for use in making future decisions regarding the planning, controlling and directing of day-to-day operations. Due to the need for timely information, there reports can be generated on an hourly, daily, weekly and monthly basis. The reports are detailed line items that give pertinent information regarding costs, revenues, quality, or production standards. This data will help determine if benchmarks have been met, and what future goals can be reasonably set. As these are not designed for outside eyes, the internal reports are not subject to outside audits, though companies may perform internal audits to ensure accuracy.

Although cost accounting does not follow GAAP, there are standards for reporting outlined by the Institute of Management Accountants.

Managerial cost concepts include knowing what costs are needed to produce a product or product line, which costs are variable and which are fixed, & how can costs be reduced or controlled. A cost accountant needs to determine which materials are direct costs, what labor costs are considered indirect costs, and how to assign overhead to specific products.

While each area has differences in the purposes of reporting, both financial accounting and cost accounting should be consistent in reporting form period to period, be prepared ethically, and contain accurate information.

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