Financial Accounting is the process of recording, summarizing and reporting the myriad (a countless or extremely great number of people or things) of transactions from a business, so as to provide an accurate picture of its financial position and performance. The primary objective of financial accounting is the preparation of financial statements - including the balance sheet, income statement and cash flow statement - that encapsulates the company's operating performance over a particular period, and financial position at a specific point in time. These statements - which are generally prepared quarterly and annually, and in accordance with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) - are aimed at external parties including investors, creditors, regulators and tax authorities.
Objectives of Financial
Accounting:
The purpose of accounting can be summarized in the following
manner:
1. Ascertain the results of operations during a period
2. Ascertain the financial position.
3. Maintaining a control over assets
4. Planning in respect of cash
5. Providing information to tax authorities and other
government agencies.
6. To properly match income with expenses.
7. To provide a reliable set of data with which to prepare
financial reports for analysis purposes
(for owners, lenders, investors, etc).
8. To provide a reliable set of data with which to report
income for tax purposes.
Difference between
Financial Accounting and Management Accounting
Financial accounting is concerned with providing information
to stockholders, creditors, and others who are outside an organization.
Managerial accounting provides the essential data with which organizations are
actually run. Financial accounting provides the scorecard by which a company’s
past performance is judged. In contrast, management accounting is concerned
with providing information to managers i.e. people inside an organization who
direct and control its operations.
The differences between
Financial Accounting and Management Accounting are given below:
External vs. Internal
Financial Accounting
Management Accounting
A financial accounting system produces information that is
used by parties external to the organization, such as shareholders, bank and
creditors.
A management accounting system produces information that is
used within an organization, by managers and employees.
Segment reporting
Pertains to the entire organization or materially significant
business units.
May pertain to smaller business units or individual
departments, in addition to the entire organization.
Focus
Financial accounting focuses on history.
Management accounting focuses on future & present. Format
Financial accounts are supposed to be in accordance with a
specific format, so that financial accounts of different organizations can be
easily compared. (Formal recordkeeping)
No specific format is designed for management accounting
systems. (Formal and informal recordkeeping)
Planning and control
Financial accounting helps in making investment decisions,
and in credit rating.
Management accounting helps management to record, plan and
control activities to aid decision- making process.
Information
Quantitative and monetary
Quantitative and qualitative; Monetary and non-monetary
Users
Financial accounting reports are primarily used by external
users, such as shareholders, bank and creditors.
Management accounting reports are exclusively used by
internal users viz. managers and employees.
Reporting frequency and
duration
Well-defined - annually, semi-annually, quarterly.
(Verifiable) As needed - daily, weekly, monthly.
Optional
Preparing financial accounting reports are mandatory
especially for limited companies. There are no legal requirements to prepare
reports on management accounting. Objectives
Objectives
The main objectives of financial accounting are :i) to
disclose the end results of the business, and ii) to depict the financial
condition of the business on a particular date.
The main objectives of Management Accounting are to help
management by providing information that used by management to plan, evaluate,
and control.
Legal/rules
Drafted according to GAAP - General Accepted Accounting
Procedure or International Financial
Reporting Standards.
Drafted according to management suitability. Accounting process
Follows a full process of recording, classifying, and
summarizing for the purpose of analysis and interpretation of the financial
information.
Cost accounts are not preserved under Management Accounting.
The necessary data from financial statements and cost ledgers are analyzed.