managerial accounting

Solution Preview

To: Susan Thomson

Subject: Managerial versus Financial Accounting

Financial accounting is similar, yet different from financial accounting in a wide number of areas. In other to better understand the difference between the two, let us start with a simple definition of both the types of accounting.

Financial Accounting can be defined as the process of identifying, measuring and communicating financial information of an organization that translates into compilation of financial reports on the organization as a whole for use by both internal and external parties whereas managerial accounting is the process of identifying, measuring, analyzing and communicating financial information needed by management to plan, evaluate and control an organization's operations.

Financial accounting basically utilizes historical financial data to communicate to the internal and external users that how well the organization has performed in the historical period. It also provides a snapshot of the organization's standing on a specific date in terms of financial data. By utilizing tools such as ratio analysis, it also provides a basis for decision making to investors, creditors, etc. regarding their investment and lending related decisions. Management accounting conveys indepth analysis about the future prospects of the organization, based on historical financial data and forecasted market conditions/assumptions in the future.

As seen from the definition above, although both financial and managerial accounting deal with financials of the organization, the purpose of the two activities is quite different from each other. Financial accounting is conducted to provide information about company's asset and liabilities as on a specific date, cash flow details and revenue/profitability data for a specific period and additional information to better understand the financial statements such as Balance Sheet, profit and loss account and cash flow statements. Financial statements, thus, depict the historical performance of an organization to numerous internal and external ...