Describe what financial accounting and management accounting are and what the main differences are.

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In this report I am going to describe what financial accounting and management accounting are and what the main differences are.  I am also going to explain how that management can use the information that is provided can be used in any decision making process and can increase the efficiency and performance of the company.

To start with I will give a brief description of both financial accounting and management accounting then show you the main differences.

In financial accounting all of the transaction of the company are external which means that they are out with the company like customers, suppliers and shareholders.  With regards to cost it only deals with the details of the expenses that the company has incurred.  The profit that is shown in these accounts shows the profit of the whole business.  People from outside the business only use the accounts of the business and these are normally put out every year or sometimes every six months.  The accounts must be put out as it is a legal requirement for businesses.  Financial accounts are to do with the costs that have already happened.  Financial accounts are the area that includes the classification and also the recording of actual transactions with regards to money.  This has to be in relation to the concepts, principles, accounting standards and legal requirements.  They then use these to give a precise a view as possible as to the effect of those transactions over a certain period of time.

Management accounting is where both internal and external transactions are recorded.  More importance is put on the analysis of costs, this is because you are able to calculate the net profit of certain divisions, departments and products.  The results of the analysis is to do with an individual responsibility therefore it can be used to monitor how well divisional and product managers are getting on.  Management accounting is done for the people that are inside the business and are there to forecast for the future of the business for any future costs or profit.  In management accounting information is gathered to help the company to come up with different business strategies to help the company plan and control the various activities of the business.  This is done to help them use their recourses better and to give them improved performance and value enhancement.

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There are five main differences between financial accounting and management accounting:

  1. Legal requirements – in financial account there are statutory requirements for all public limited companies that requires them to show their annual financial accounts even if there own management thinks the information is going to be useful or not.  But in management accounts it is the companies own individual choice as to whether they want show this information, they normally only show it if there is more of a benefit to the company.

  1. The focus on the individual areas of the business – financial ...

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