Many managers, leaders and owners have seen accounting as a zone of despair. Accountants may also "enjoy" the level of mystique that keeps business leaders and investors alike asking "how, where, and why did I miss that much money or opportunity? " There are two primary means of accounting, finance and management accounting. While both types of accounting work from the same set of numbers, the uses of each vary according to the intended uses of the resulting reports. Finance Accounting What is financial accounting all about?
According to the website Wikipedia, "finance studies and addresses the ways which individuals, businesses and organizations raise, allocate and use monetary resources over time, taking into account the risks entailed in their projects. " Accounting is "the process of identifying, measuring, and communicating economic information about an organization for the purpose of making decisions and informed judgments" (Marshall, 2003). Therefore, financial accounting "includes information disseminated to parties that are not part of the enterprise proper, stockholders, creditors, consumers, suppliers, regulatory
commission, financial analysts, and trade associations – although the information is also of interest to the company's officers and managers" (Elissetsche, 2005). These accounting reports provide financial information needed to make necessary business decisions, and are available to the public to review. The primary financial report used is called the balance sheet. The balance sheet provides information relating to the assets, liabilities, and owner's equity of the company. Two other financial reports are the Income Statement and Statement of Cash Flow.
Financial accounting impacts businesses in many different ways. The income and cash flow statements reflect transactions at a given point in time relating to the business operations being reported. With the information provided in these reports, organizations can answer questions about the company's past financial experience. In addition investors may begin to forecast the future possibilities a company may hold and make necessary operational or financial changes in order to get the results that they are looking for. Business leaders and investors need to bear in mind
that this information is based on history and that there is no guarantee that the organization's future will have the same results as in the past. Managerial Accounting Managerial accounting, or better yet cost accounting, principles have been around since the early 20s, but during these early years it was seen as more of a subset or subordinate to financial accounting (Richardson, 2002, p91). The advent of the IMA and its push for managerial accounting specific certification such as Certified Management Accountant (CMA) has begun changing this view, by legitimizing it as a profession in its own right (White, 2005, p6).
Managerial accounting as the name suggests is concerned with the use of economic and financial information to plan and control many of the activities of the entity and to support the management decision making process (Marshall, 2004, p7). What sets managerial accounting apart from basic financial accounting is its focus. As Larry White, out going Chair of the Institute of Management Accountants, (IMA) points out, "Management accounting is about building quality decision support, planning, and control processes over the value-creating operations inside organizations" (White, 2005, p6).
This sets it apart from financial accounting whose focus is more on symptoms verses causes because of its adherence to Generally Accepted Accounting Principles (GAAP) (White, 2005, p6). Key here is that the managerial accountant should be more of an internal annalist that helps the corporation uncover root causes and provide input towards possible fix actions, whereas the financial accountant's role is that of external information preparer. Applications in Today's Business World Accounting standards provide the accountant with a guideline to report economic transactions and events for an organization.
How economic events and transactions should be recorded can vary from country to country (McCombie & Deo p. 154). The state of American accounting is much better than it was before the Enron scandal, according to the U. S. Securities and Exchange Commission (SEC) but it is still in need of improvement. The Exchange Commission feels that changes are needed in accounting leases, pensions and derivatives, all aimed to make things better for investors to determine the accurate state of balance sheets in U. S. companies (Norris p. 12).