While running any organization, it is essential for the leaders of the business to clearly distinguish the two aspects of accounting to avoid confusion that can be brought about by lack of knowledge on how the two business aspects operate.
It is important to note that financial accounting is legally required by law and must, therefore, be provided as opposed to managerial accounting (Deegan, 2013). Financial accounting hence covers the whole organization while managerial accounting may only be concerned with a given product. This is why outsiders of the company or organization majorly use financial accounting. The financial reports are always created for a specific period, say, daily, weekly, one year or so. These reports should show factual information about transactions of the company and should have predictive value to any person who wishes to come up with financial decisions or by investors who would want to put their money in the company.
On the other hand, management accounting provides information to people within the company. Concerned individuals use it in the business organization. In managerial accounting, financial reports can be generated for any period like daily, weekly and even monthly (Garrison et al., 2010). These reports made are considered to have a forecasting value to people in the business organization. It can, therefore, be concluded that management accounting is a branch of accounting that reservedly deals with confidential financial reports for the sole use by the organization's top management to help them make informed accounting decisions (Deegan, 2013). Some of the decisions that the management can create using these accounting elements include;
Revenue Measurement and Recognition
This is another essential business aspect that any organization that wishes to succeed in the objective of revenue accumulation has to follow. It is always simpler for businesses to determine when a service has fully been rendered or when a sale has been completed.
In most cases, it is true that revenues are recorded when the product in question is received, shipped to other organizations or when the business offered a service to individuals customers or other business partners. Notably, this is not the case in some companies because it becomes challenging to exactly know that revenues have been earned in the business (Hilton & Platt, 2013). This is so because it becomes a task to establish a rationale on how revenues should be recognized in a situation where, for example, a customer takes delivery of products but opts to pay after several years. One of the widely advised approaches is by considering all the revenues collectively as received upon product delivery.
Another way of revenue recognition is by considering the ability of the customer to settle its commitment in the future. Additionally, the other issue that should be addressed while talking about revenue measurement and recognition is knowing what exactly constitutes revenue of the company. In a case where a business sells an item for $90 through auction. Out of this, $10 is given to the auctioneer as a commission. It becomes a question whether or not the auctioneer should include the whole amount of sale as revenue in the financial statements and call the $80 to the original owner of the item as an expense. There are also debates on whether it should be referred to as revenue and indicate no expense. In most cases, the latter approach is preferred by many business accountants
Provision for uncertain future costs
Managerial and financial accounting information also help organization management to decide costs that will possibly rise even when the correct values cannot precisely be identified (Elliott & Elliot, 2007). These can include costs such as stock obsolescence, the return of products, costs of restructuring, damages as a result of a product recall, uncollectible accounts among others. To ensure that this provision is factored in, management can ensure that they allow for estimates to be overstated to create for unseen reserves so that there is room to boost profits in future thereby predicting a misleading earning stream as well as being reduced to promote reported profits.
Valuation of the business assetsIn addition to the above, the decisions derived from accounting information can also be used by the management in the valuation of the business assets. It is known that a business asset is anything that has a current or intrinsic value, like cash, or those business items that can be used to generate revenues for the business (Garrison et al., 2010). These can be premises like buildings that can be used to manufacture or produce a product and or any inventory that will be sold in the future to help generate profits for the company. They have carried at cost less any estimated depreciation. However, the freedom that is to be given to the company management in coming up with such estimates can raise questions, and that is why a clear procedure has to be underlined to guide this process.
Deegan, C. (2013). Financial accounting theory. McGraw-Hill Education Australia.
Elliott, B., & Elliott, J. (2007). Financial accounting and reporting. Pearson Education.
Garrison, R. H., Noreen, E. W., Brewer, P. C., & McGowan, A. (2010). Managerial accounting. Issues in Accounting Education, 25(4), 792-793.
Hilton, R. W., & Platt, D. E. (2013). Managerial accounting: Value-creating in a dynamic business environment. McGraw-Hill Education.
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