compare and contrast financial and management accounting

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Introduction

In this essay, I will compare and contrast financial and management accounting and how they differ; as well as the extent the two approaches reflect the different purpose and role by using academic journals throughout for my research. Financial accounting can be defined as the process of identifying, measuring, classifying, accumulating, summarizing, and communicating information about economic entities that is primarily quantitative and is useful to decision makers (Seidman, 2005). Accounting information is designed to be used in making financial decisions. It is primarily quantitative in nature, and it relates monetary information to a specific entity. Senior management and outside investors rely on the information provided by a firm's financial accounting system. They want to project future cash flows, revenues, or profits and use that information when evaluating the performance of organisation or assessing the feasibility of granting a requested line of credit (Seidman, 2005). The primary role of accounting information is to provide information for decision-making purposes. Both financial and management accounting relies on the same basic accounting database. However, there are important differences between the two disciplines.

Middle

Although, he is aware that as there are benefits to harmonization, there are also barriers to harmonization and one of them is information will be different to derive from non domestic accounting standards. As with different social and economic institutions and with different cultures, laws, business practices and business ethics, one wonders whether a single set of accounting rule truly harmonizes anything but recognises that the most basic cultural disparity that must be overcome is language. Not only is language a reflection of a culture but it also reflects that cultures degree of technical sophistication (Seidman, 2005). In contrast, management provide a financial analysis of management decisions and activities. As such, the reports generated by the management accounting system are used by organizations internally. In essence, management accountants prepare the reports by which operations managers are evaluated (Fry and Steel 1994) Fry and Steele (1994) acknowledge the extent of rapid increase in every aspect of information technology has brought about a faster change in management accounting. For example, budgeting and budgetary control has not only changed by monitoring plan with actual but also forecasting the future trend as norms.

Conclusion

As absorption costing takes the view of arbitral percentage regardless of the reality of indirect cost traceable to a product. The emergence of Activity based costing changed this view that a product must be directly linked to indirect cost in the right proportion that they relate to the cost of producing the product. E.g. where an indirect cost are shared equally in a multi products production line in absorption costing as a proportion of percentage, this is no longer the case with ABC (Fry and Steel 1994). In conclusion, all three writers/authors agree that the social and economic change in the past has pushed the change barrier further and further. As the society continues to change, so also will be change in organisation strategy in the use of information in making quality decision in the running of their affairs. The nature and effect of government legislation in the control of a more global organisation not only has contributed, but will continue to contribute to further development of financial and management accounting in the future. Organisations that are not ready for a re-think will further find they are unable to face competition in the new global market.

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