Wednesday, December 7, 2022

What is Management Accounting & Financial Accounting?

Accounting refers to all actions from recognizing and recording the income and expenditure of economic activities and reporting to interested parties. Accounting is broadly divided into management accounting and financial accounting, and the processing method differs depending on the purpose of accounting.

Management accounting is accounting for managers to manage a company, and financial accounting is accounting for reporting financial status to interested parties. Due to legal obligations, all companies are required to perform financial accounting, but management accounting is not obligatory, so the implementation status and method differ depending on the company.

This time, let’s look at the merits of incorporating management accounting and the business of management accounting from the difference between management accounting and financial accounting.

What is management accounting?

Management accounting refers to accounting that summarizes the information necessary for a manager to manage a company. The term “manager” here refers to officers such as the president and directors, and managers (employees with management responsibility).

In management accounting, the current state of the company is grasped and future changes are predicted through accounting. There is no standardized format for management accounting because what kind of information is emphasized in management differs depending on the manager. The type, accuracy, period, etc. of the information to be taken in are determined by the company.

Purpose and necessity of management accounting

The purpose of management accounting is to provide the information necessary for management decision-making. Typical materials in management accounting include “budget management” for formulating future budgets from past results, “budget management” for comparing budgets and results to identify management problems, and numerical management status.

For example, “management analysis” that objectively judges the state of a company. Management and analysis performed by management accounting is necessary to determine the company’s policy by comparing the past and the future. From an accounting point of view, identify the issues hidden in the process from the past to the present, such as whether you could actually reach the point you thought you could reach, and if you could not, what was the cause, and take action for improvement. It is used as a material to wake up.

Benefits of introducing management accounting

Since the introduction of management accounting is voluntary, there are no legal penalties even if it is not adopted at all. Still, are many companies actively adopting management accounting? Here are four benefits of introducing management accounting.

Can be evaluated segment by segment

Information that divides the sales, profits, financial status, etc. of a company or group company by business unit is called segment information. Listed companies disclose segment information for information disclosure, but such segment information can also be used in management accounting.

In addition to business units, management accounting analysis can be performed by collecting segment information by department, service, product, and so on.

By performing segment analysis, we can see the profit status, sales growth, debt collection status, etc. by service and product that could not be seen from the financial statements. It will also greatly help determine the future direction of the company, whether to expand or contract existing services, and what areas to focus on.

Can quantitatively evaluate the business situation

In management accounting, management analysis is performed through indicators that use numerical values ​​such as financial statements.

Typical indicators used in business analysis are the capital adequacy ratio, which looks at corporate safety from the capital adequacy ratio, the operating profit ratio, which looks at the ratio of sales to operating profit, and the total capital, which looks at the degree of capital utilization. There is a turnover rate and so on.

Since these indicators are calculated by extracting from numerical values ​​such as financial statements, the business situation can be evaluated objectively and quantitatively.

Easy cost control

By utilizing segment information, etc., you will be able to understand the budget setting and budget achievement status for each product or service. Since the cost of product development and service operation is clarified, it becomes easier to judge the amount of cost input and cost-effectiveness, which leads to cost management and cost reduction.

Grasp the cash flow and use it for management

As a management accounting method, there is also cash flow management by creating a cash flow chart. Cash flow management is to focus on managing the flow of funds of a company and to grasp the state of cash flow that cannot be tracked only by the figures in the financial statements.

Keeping track of cash flow in management accounting will help you make management decisions such as raising funds, and will also help prevent bankruptcy in the black due to a large shortage of company funds.

Management accounting business

The main business of management accounting is business analysis, budget management, cash flow management, and cost management. Let’s take a look at the content of each business.

Business analysis

Business analysis is an analysis performed to understand the business condition based on information such as financial statements, survey reports, and special surveys. In management analysis, we analyze the state of the company using various indicators such as the capital adequacy ratio, and grasp the state of management from all angles.

The general categories of indicators used in business analysis are profitability analysis, safety analysis, productivity analysis, efficiency analysis, growth potential analysis, break-even point analysis, and debt repayment ability analysis.

By conducting management analysis, you can objectively grasp the situation of your company, such as how much profit your company is making and how safely you are managing your assets, and you can extract the strengths and issues.

Budget management

Budget management is a management method that grasps the budget set according to the management goal and the actual results for it. Materials such as a budget management table are created and the budget and actual results (preliminary and actual) are compared.

In order to make budget management fruitful, it is ideal to manage it so that the changes in the actual results can be tracked in real-time with respect to the proper set budget value. In the actual management accounting field, budget comparisons may be made by associating data such as accounting software with the budget.

The merit of performing budget management is that by grasping the budget and actual results, it is possible to analyze the cause of the budget failure and correct the trajectory to achieve the next goal. This comparison of forecasts and actual differences is useful for analysis from all angles, as not only is this poor performance, but it can also be caused by excessive budgeting.

Cash management

Cash flow management refers to management that grasps the flow of deposits and withdrawals of the company and prevents the company from running out of working capital.

Even if profits are recorded in the financial statements and there are sufficient assets, there are many receivables such as accounts receivable and accounts receivable that cannot be immediately monetized, and there are cases where the cash and deposits required for the company’s payment cannot be secured.

Cash flow management helps to adjust future financing by clarifying the timing of monetization of receivables and the existence of payment obligations and comparing them with the flow of cash and deposits of the company.

Cost management

Cost control is management to determine the aptitude of the cost incurred to provide a product or service and to improve the cost. Use the costing sheet, etc. to manage the target value and actual value of the cost.

For example, in the manufacturing industry, raw materials and parts required to make products, labor costs of personnel involved in manufacturing, utilities costs of factories that make products, machinery, etc. are calculated and managed as manufacturing costs.

What is financial accounting?

Financial accounting is accounting performed to report the financial status of a company to interested parties (investors, creditors, tax offices, etc.) outside the company.
When reporting, we will prepare and disclose a financial report that complies with accounting standards.

Purpose of financial accounting

The purpose of financial accounting is to disclose the financial position and operating results of a company to stakeholders outside the company.

The financial position is the status of assets and liabilities owned by the company on the closing date, and the business performance is the effect of profits generated during the accounting period including the closing date.

In order to disclose the financial status, the company must prepare a financial report. Financial statements include balance sheets, income statements, and cash flow statements.

The balance sheet shows the financial position of a company’s assets, liabilities, and net assets as of the closing date (end of the accounting period).

The income statement is a document that shows the income and expenses from the beginning of the period to the closing date and clearly shows the difference as business results.

The cash flow statement is a document that shows the inflow and outflow of funds from the beginning of the period to the closing date and the reason for it, and shows the flow of funds of the company and the amount of cash and deposits as of the closing date. The cash flow statement is required to be prepared for the settlement of accounts of listed companies, but it is not obligatory to submit it for the settlement of accounts of small and medium-sized enterprises.

Two functions of financial accounting

Information provision function

The information provision function is a function that provides stakeholders with useful information for making investment decisions.

For example, when an investor decides whether to invest in a company, he or she will not be able to make an investment decision without any information. However, if you have information such as financial statements, you can analyze the company and make investment decisions.

As another example, when a bank decides whether to lend to a company, the bank uses information from the financial statements to understand the company’s property, repayment ability, profitability, etc.

Interest adjustment function

The interest adjustment function is a function that adjusts the interests of stakeholders.

There are various possible interests depending on the position of the stakeholders, but let me explain two concrete examples.

The first is the interests of shareholders and management.

Shareholders expect dividends and stock prices to rise as the funds they invest in the company are properly managed.

One manager may use the money invested by shareholders for the purpose of raising his executive compensation or for entertainment expenses.

By disclosing financial statements to shareholders regarding these interests, management can report that they have managed their funds appropriately and, as a result, adjust their interests.

The second is the interests of shareholders and creditors (corporate suppliers and banks).

Shareholders have the expectation that they will distribute the company’s funds as much as possible.

Creditors, on the other hand, will be in trouble if the company runs out of funds and is not repaid.

Therefore, by disclosing the financial statements to shareholders and creditors, it is possible to confirm how much dividends shareholders can expect and whether creditors can receive repayments, and as a result, adjust their interests.

What is the difference between management accounting and financial accounting?

The differences between management accounting and financial accounting are as follows.

  • Management accounting: Internal accounting for management to manage business
  • Financial accounting: External accounting to convey financial status

A further comparison between management accounting and financial accounting is as follows.

Management accounting is voluntary and is performed by the management for the purpose of business management, so the details vary depending on the company.

On the other hand, financial accounting is basically adopted by all companies. Since financial accounting has the purpose of communicating the financial status of a company to the outside, it is necessary to prepare financial statements that comply with accounting standards.

In addition, there are the following differences between management accounting and financial accounting depending on the information handled.

  • Management accounting: future information
  • Financial Accounting: Past Information

Management accounting handles future information for estimating future plans and budgets and managing a business. In financial accounting, past information such as transactions and events up to that point is recorded and aggregated as accounting.

Corporate accounting is divided into financial accounting and management accounting

As mentioned at the beginning, the procedure for calculating a company’s property and business results is called corporate accounting. Corporate accounting is divided into financial accounting and management accounting depending on the purpose. The following is a brief explanation of the corporate accounting principles that are the premise of financial accounting. If you are interested, please refer to this as well.

What are Corporate Accounting Principles?

The Corporate Accounting Principles are a summary of what is generally accepted as fair and appropriate in the practice of corporate accounting (financial accounting) and are the norms that all companies should follow in conducting financial accounting.

There are seven general principles of corporate accounting and those that follow the general principles (8th below).

  1. Principle of truth
  2. Regular bookkeeping principles
  3. Principle of capital transaction/profit/loss transaction classification
  4. Principle of clarity
  5. Principle of continuity
  6. Conservatism principles
  7. Principle of unity
  8. Principle of importance

The most important of these is the principle of truth. This stipulates that false accounting such as window dressing and false statements should not be made.

Management accounting and financial accounting are different! Understand the purpose and who it is for

Management accounting and financial accounting have different purposes. Management accounting is to provide useful information for people inside the company such as managers to manage. Since the accounting is for management, not all companies are obliged to manage accounting, and each company can introduce it according to the purpose of management.

Financial accounting, on the other hand, is meant to provide information to stakeholders. This is done so that shareholders, investors, or creditors who lend money to the company can properly understand the business situation of the company. All companies are required to deal with financial accounting (financial accounting that corresponds to institutional accounting) stipulated by law.

In this way, management accounting and financial accounting are grouped together as the same accounting, but their purposes are very different. If you pay attention to the differences, it will be easier to understand the characteristics and significance of each.

Priyanka Sharma
Priyanka Sharma
Myself Priyanka, I Love Writing, SEO, and Graphic Design. I'm regularly contributing my knowledge/news on the leading websites.

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