Friday, May 27, 2022

Management Accounting vs Financial Accounting: A Concise Guide to the Differences

Hi welcome to this concise guide about the differences between management accounting and financial accounting okay this video will cover five major differences between management accounting and financial accounting we're going to talk about the different uses of the information those being external versus those internal what .

We're going to talk about how there's generalized information versus specialized information how there's historical information versus information using a future based perspective has rules based reports versus customized reports and finally we'll talk about the overall different functions of the management accounting .

And financial accounting okay let's get into it let's talk about the different uses of management accounting and financial accounting now financial accounting is meant for those who are external to the organization who need to get a view inside so these people are external to the organization that I know exactly what's going on by working .

Inside the organization these people could include Oakland investors or owners of the organization or creditors or tax authorities or other regulators suppliers and customers or employees and unions and all these groups are external to the organization who need to know what's going on inside the organization and they use financial accounting .

Reports to get that view inside so investors may want to know whether to buy or sell a particular stock our creditors may want to know whether they should lend them lend right into this organization or so forth tax authorities may want to know how much should we tax this organization suppliers and customers may want to know that the .

Company is secure the organization is secure and they can pay their bills they continue to pay their wages and employees may want to know how profitable the businesses so they can continue to pay their employees or use particular financial information that may assist with wage claims and all these groups are external who need to .

Get a view inside the organization and they use financial accounting data on the other hand management accounting is meant for those who are internal to the organization so people that work inside the organization who need particular information to achieve the organizational goals and management accounting can provide some of this .

Information so we're talking about people like CEOs or general managers or further down such as Department of division managers or even shop floor staff and all these people so they can achieve the organizational goals need particular pieces of management accounting information and it will assist them achieve those goals so the .

CEO might have a higher level overview and he might use a balanced scorecard or other types of management accounting reports against a higher level overview and even short floor staff if they want to they want to assist achieve the organizational goals they might have production targets or sales quotas that they have to meet so they will have .

Particular management Academy reports the key idea is management accounting reports are meant for those who are internal to the organization ok next up we have generalized information versus specialized information so financial accounting financial accounting uses the same three or four financial statements to meet the needs of a wide variety of .

Users so those three or four financial statements are the income statement the balance sheet the cash flow statement and the fourth is the statement of changes in equity and as the same three or four statements between every organization on the planet and because they use the same particular information and they're going to meet the needs of .

All the users of a wide variety of uses to remember we talked about them earlier by the investors and the credit isms and the suppliers so to get so much to satisfy the needs of so many people with the same particular statement this often results in financial accounting information being very generalized and aggregated and it always follows a .

Similar format you'll often find that the financial statements are often public information and as a result some organizations don't want to I disclose all their proprietary data in secret knowledge to a public audience and thus financial accounting of to remove some of the proprietary details and the specifics so removing the secret .

Sauce causes the information to be aggregated and generalized and the fact that so many people have got to use the same three or four financial statements all the causes to be general generalized and aggregated and follow a similar format now management accounting reports on the other hand are normally only produced to meet the needs of a specific .

Decision-maker so unless the decision has to be made the management accounting reports aren't created and as a result of having to being required for specific decisions management accounting reports are very specialized and have a level of detail to make a specific decision further management can report to also private so .

It's not like the public financial statements management can report only for those internals of the organization and even perhaps only different departments of different individuals get access to particular management accounting reports so nothing really needs to be concealed within the management accounting reports and this .

Often results in an increased level of detail as opposed to financial accounting reports so we have private management accounting reports have a high level of detail and a very specialized in regards to making a specific decision for the business to achieve the organizational goals alright next up we have historical versus a .

Future perspective now Financial Accounting is based on historical transactions and in fact for transactions to be recorded within a financial accounting system these transactions must have been based on past events in other words something must have already occurred in the past for it to be able to recognize within a .

Financial accounting system and as a result financial accounting is primarily backward-looking or historical walking it will to what happen in the past on the flipside management accounting it also uses some historical data you loft is something that doesn't use historical data but it's meant to be used for decision-making for the future and .

Mainly management accounting reports have future orientated future orientated data within them for example within budgets so for a budget you might have a 24-month budget like a two-year monthly budget and only um and perhaps all of the budget is future orientated stuff that hasn't already happened yet their predictions or or their predictions or .

Assumptions so it's very future-oriented and management accounting is far more forward-looking and financial accounting so while it still uses home in some historical data you'll often find manage many management accounting reports have data that's based that hasn't happened yet and this doesn't occur with financial accounting okay next up rules .

Basis versus customized reports now financial accounting transactions and their subsequent subsequent reports follow specific accounting rules so they may follow IASB standards or US GAAP generally accepted accounting principles and all financial carrying transactions and their and their reports have to follow these particular rules but this .

By following these rules financial accounting reports emphasize reliability over relevance and about comparability across organizations so when financial accountants are being trained they're taught about what particular transactions and how about about how particular transactions and measured a certain way it removes it removes a .

Level of discretion and limits accounting policy choice and what this means is if you lift up a financial report financial accounting report from Walmart and a financial accounting report from Amazon you know that the reports are based on the same accounting rules on the same accounting methods or very similar accounting methods and this .

Allows and by for everyone following the same rules it does of our comparability across that organization and so by following a financial accounting rules we emphasize reliability of relevance what we want with financial accounting reports is reliable accurate data even if it takes a little bit longer to produce or even if it is less .

Relevant to specific decisions it's not exactly what we need to make a particular decision all we want is generalized reliable financial accounting data now on the flip side Management Academy reports and not subject to any rules they're customized for specific situations and going to take any form so you and I right now .

Could create a specific management accounting report we could pull some financial data and some non-financial data and create a report and make a decision there is nothing that says we cannot do that there will be a hundred percent perfectly valid management academy award management calendars and does not have any specific accounting .

Rules and by not following rules management accounting emphasize relevance overall liability and this means that the the reports are relevant to the particular decision that we're making and what we want the numbers do reliable we emphasize relevance we want something we want management accounting information that's relevant to the .

Particular decision we have to make and we emphasize that over reliable numbers another example is our annual report you know how annual report and they include the financial statements but any reports normally come a few months after the end of the financial year so it takes a few months to get other order the financial accounting reports sorted out and in the .

Annual same in the annual report now this may be reliable for those decisions but how relevant would those financial financial accounting statements be if we had to make a decision a few weeks or one month after then the financial year you know we had to make a decision that's soon waiting three or four months for that fine and for that annual report .

Wouldn't be very helpful at all so the emphasize relevant to the decision over specific unreliability and further because there are no rules each organisation would have their own specific management accounting reports so while there's some general management accounting theory which permeates all organizations you will find that .

Whatever organization you're working in each organization will have their own specific tailored management accounting reports so in organization a they may use rolling rolling budgets while in organization B they may use a fixed period budgets and neither is right or wrong it time specifically each particular organization and finally the .

Overall functions of management accounting and financial accounting now I was taught that the functions of financial accounting are decision-making contracting and stewardship so the whole reason for having financial accounting and financial accounting reports is to aid in decision making contracting and stewardship and by decision making .

That's for external investors and external creditors deciding whether or not to buy or sell shares buy or sell shares or to whether or not to lend money to a particular organization and financial accounting reports aid in that decision-making secondly there's contracting and this is our management and employee contracting and also our .

Debt contracting so to assist with creating creating perhaps EEO contracts or staff contracts particular financial accounting reports and financial accounting data can be bedded into these particular contracts and financial accounting a/c Senate contracting um process and finally stewardship stewardship Cid that we have to be as .

Stewards of particular organizations we're responsible to our stakeholders that we there were good stewards of the resources under our control and financial accounting reports allow us to prove on how we've performed extruder particular of a particular organization and that's another reason one we have .

Financial accounting data okay either on the other side there's management accounting and these functions are a little bit different now the functions of management accounting are decision-making and control so it is decision to decision-making is similar to financial accounting however is different type of decision making with .

So much decision-making for those internal to the organization and it is specific decisions that will achieve the overall organizational goals and that's how we have management accounting so rather than those external to investing or lending this time it's internal and we need to make decisions to achieve the organizational goals and .

Secondly it's control and management accounting reports helps control those within the organization in two respects firstly it can align all employees within an organization to work towards the same overarching goal so originally a company vision may be set company targets might be set and this can these vision and targets can be filter all .

Throughout the organization through management accounting reports and anyone that comes across these management accounting reports can can buy into the particular position of the organization and it aligns the objectives of all the staff towards the one goal secondly it can can you can also control the particular actions we take within .

Strategy and the action plans of the organization so we may have our budget that has particular sales targets and if we don't hit a sales target for a particular month we can use that management accounting report the budget measure our performance against our target and if we don't meet a particular target measure then we can control our .

Actions for the following period about how we can in a later period achieve our particular sales targets and that's just one example so you use management accounting or to set targets to measure performance against those targets and depending on whether you hit those targets or not you can control your particular behavior and .

Take different actions perhaps perhaps action a or action B within the organization and that's on the second section of control okay that's either thanks very much for you time we've just covered the five main differences between financial accounting and management accounting and I hope you enjoy the video and I hope you can give .

Me a thumbs up for the video thanks very much you

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