Horngren's Cost Accounting (16th Edition) Edit edition

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Financial accounting: Under financial accounting, business transactions are measured and reported in the form of financial statements. Generally accepted accounting principles (GAAP) are followed while preparing the financial statements. The intended users of the above financial statements are external users like investors, banks, suppliers, and government agencies.

Financial Statements: The statement prepared for the specific period which comprises the financial information of the organization. It includes a statement of income which shows the profitability of the business, balance sheet which shows the financial situation in the terms of assets, liabilities and capital, and cash flow statement which represents the cash flows for the accounting period.

Management accounting: Management accounting measures, analyzes, and reports not only financial information but also non-financial information. Both financial and non-financial information helps managers to take timely decisions to achieve the goals of an organization. The above management accounting information helps not only in planning the various activities of the organization but also in performance evaluation and taking corrective actions when there is a deviation from the charted path.

The differences between financial and management accounting systems is summarized as follows:

Objective of the organization:

• The primary objective of management accounting is to help the managers of an organization to allocate the resources efficiently whereas the objective of financial accounting is to help the external users to allocate resources at their disposal.

Primary Users:

• The primary users of management accounting are managers of the organization itself and whereas the primary users of financial accounting are external users like investors, banks, regulators, and other who are external to the organization.

Focus and emphasis:

• Management accounting focuses and emphasizes on future oriented activities like budgets etc. While the financial accounting focuses on the past performance of the organization.

Rules of Measurement and Reporting:

• The preparers of the management accounting reports have no obligation to follow GAAP but mainly driven by the cost-benefit analysis. The financial accounting reports (Financial Statements) are prepared strictly in accordance with generally accepted accounting principles (GAAP) and these statements are certified by external and independent auditors.

Type of Reports and Time span:

• The time span of the management reports vary from hourly information to yearly plans ranging up to 15 to 20 years. These reports consist of both financial and non-financial data information and can be prepared product, department, territories and strategies wise.

The time frame for financial reports may range from the quarterly to annual reports and primarily prepared on the company as a whole.

Behavioral Implications:

• Management accounting reports influence the behavior of the managers and other employees of the organization. The financial accounting not only reports the economic events but also influences the behavior as the managers’ compensation is often determined by the reported financial results.