3 Management and financial accounting
From Section 2, it is clear that accounting information has a number of different purposes, governed by the needs of those using it. This brings us to consider different types of accounting, namely financial accounting and management accounting, as the purposes fulfilled by accounting information generally fall under one or the other heading. It is important to note that this does not mean that any different types of books or records need to be kept. It is just that the information produced from the books and records organises, classifies, summarises and communicates information according to the perspectives and needs of the users, as Table 1 below shows.
Table 1 Differences between financial and management accounting
|Financial accounting||Management accounting|
|Chief purpose||Production of summarised income statements and balance sheets by managers as a formal report on the stewardship of resources entrusted to them but should also, in the case of public companies, help interested parties (such as investors) make decisions. Depending on the type of the business entity, documents may be publicly available.||Production of detailed and up to date information used by managers to plan activities and control them. This information is not publicly available, but is internal to the entity producing it.|
|When information is prepared||Annually, at the end of an accounting period, but, depending on the type of business entity, may be every three or six months as well.||Normally prepared on a monthly basis.|
|Governed by||Legal requirements and often mandatory accounting regulations* and/or conventions which may also dictate a required format (though this depends on the legal form of an entity).||Management needs only – with no legal requirement to produce anything in any format, or anything at all. Information is produced in the format management deems most useful, e.g., by operating unit or product line, to record and monitor sales (by product, region, etc.), costs of production methods or products.|
|Perspective||Gives information about past performance, and might in practice be outdated by the time summarised documents are produced.||Comparative and up to date. While a given month’s results are provided, these are usually accompanied by a total for all months to date and comparative figures for a prior year (as well as for planned activities in the month and period to date).|
Which of the following statements is untrue?
- Financial statements are usually produced annually and management accounts are usually produced monthly.
- Financial statements are more accurate than management accounts.
- Financial statements may be audited by an external auditor and management accounts are not audited.
- Financial statements are intended primarily for external users and management accounts for internal purposes.
Take ten minutes or so to type your answer.
All statements are true, though in the case of Statement 2, it does depend on the extent to which financial or management accounts may contain estimated figures, which are appropriate in certain circumstances, as you will learn later. Remember that all accounting information is produced from the same records – but at different times and for different purposes. It should all be of similar quality. Note that, in respect of Statement 3, while management accounts are not audited, not all financial statements are either, hence the subtle use of the phrase ‘may be audited’ in respect of financial statements. The requirement for audit is determined by the type of organisation and its size.