1.5 Financial and management accounting

Financial accounting is principally concerned with preparing financial reports for external users such as banks providing loans or tax authorities who want to know what tax is due from the business.

These statements will also be of interest to managers of an organisation, but they will not be sufficient for managers’ information needs in the day-to-day running of an organisation. For this, much more detailed and more frequent accounting information is required. Providing such information and analysis is the function of management accounting. This area of accounting covers all areas of management decision making such as setting the price of a good for sale, deciding on the cost of a manufactured good or deciding what type of a budget best suits a business.

By contrast, outside users of financial information, such as loan providers and taxation officials, want summarised financial information that should be thoroughly checked before the business makes it available. For a sole trader, the smallest type of business, this checking process is done by the owner or, if the business is large enough, an internal employee or external accountant. Preparing financial statements for external users takes much time, experience and knowledge and, for larger private companies and all public companies, involves a detailed checking process by specially trained independent accountants known as auditors. The area of accounting that is targeted primarily at those outside of the business is called financial accounting.