Managerial accounting as the name suggests provides information to the internal users of accounts. Internal users include executives, product managers, and sales managers to name a few. Any other user within the organization may also benefit from managerial accounting methods and use the compiled information to make informed decisions that would affect the financial performance of the company. As the information gathered is for internal users there is no compulsion that the data should abide by US GAAP rules (Heisenger & Hoyle, 2013). For example, a sports good manufacturer may add the non-production costs to the inventory as the internal users are much more concerned with the aggregate costs.
Financial accounting provides information for the use of external users of accounts which include shareholders, banks, and bondholders to name a few. The information provided by the financial accounting principle is historical in nature and helps the external users to make decisions and conclusions about the firm’s profitability and future prospects. Unlike managerial accounting, financial accounting has to abide by the US GAAP rules in order to be in a consistent method (Heisenger & Hoyle, 2013). As the information is for external users it is not as extensive as that produced by managerial accounting. Thus, keeping into consideration the above discussions about managerial and financial account the main difference between the two is that managerial accounting helps in the decision making process within the company; whereas, financial accounting is used by people outside the company.
Financial statements are prepared to summarize the performance of the company in quantifiable terms. These accounts may be used by internal or external stakeholders as mentioned above. Depending upon who the user of the financial information is the conclusions drawn from the presented information would differ. As mentioned earlier, internal users generally comprise of managers and owners. The management needs this information so that they are able to make well-informed business decisions that would have a positive impact upon the profitability of the company. Consequently, the financial analysis has to be used alongside the financial statements made available by the financial manager to the management of the organization. Therefore, this analysis of financial statements would also assist in having contracts and conducting business with other companies. Employees, on the other hand, may use internal records of financial statements for several purposes including; collective bargaining, salary increases, or prospective promotions (Finance: Maps of World).
The role of management accounting is critical for the functioning of the firm in a productive and efficient manner. They help collect, process, and communicate information which in turn assists the management to plan, control, and evaluate business processes and strategies. In most firms the controller heads all the individuals who are related to the profession of accounting in some way which includes; financial accountants, cost accountants, tax accountants, and internal auditors. As there is no profession or position within a company stated as “management accountant”; therefore, the controller overlooks all accounting details. Thus, we can say that management accountant takes into consideration the costs, quality, and time into account when making decisions to have a positive impact upon the organization. As the controller is overlooking several different functional units, he/she can take into account other aspects of a decision apart from the costs. For instance, the tax accountant may handle the tax liability of the company and the cost accountant may do the inventory costing, but the controller ensures that both these professionals work in integration to ensure prosperity in the business.
As discussed above the role of managerial accounting and financial accounting differs because of the different users who use the respective information. However, both the disciples are interconnected to a large degree. Managerial accounting has adopted ways of financial accounting in terms of the general ledger methods. This has been beneficial in today’s business environments and with the increase in use of the Just-In-Time inventory methods. The JIT method has forced firms to incorporate time and costs analysis in their decision-making. Therefore, managerial accounting uses both these concepts when making informed business decisions within the organization. In today’s highly competitive environment it is essential for controllers to have a sound base and command over the new technology in order to incorporate this technology in the accounting profession and attain maximum benefit from this (Loo, Verstegan & Swagerman, 2011). Furthermore, managerial accountants are not just limited to manufacturing industries like earlier times. As these accountants were common for firms holding large inventories today, they are common for service sector firms as well which hold minimal inventory. With the advent of e-commerce as a growing and potential way of conducting business, managerial accounting has started to signify its importance in this sector as well.
The profession of accountants is a rather common profession and there is a surplus of accountants in the market. Therefore, accountants need to differentiate themselves in order to appeal to employers. The Certified Management Accounting degree helps alleviate the position of accountants ahead of their counterparts in the job market. Furthermore, because of attaining the CMA examination the individual who clears the exam have several more job opportunities that help him go higher on the career ladder. A person who has a CMA qualification proves to have a better understanding about the accounting profession; thus, places him/her on a pedestal as compared to other accountants (Accounting Coach). An individual who has a CMA qualification has a competitive edge over other accountants and are able to find better jobs with a greater variety. As the supple of the CMA graduates is currently low, the jobs offered to these individuals are paid higher as compared to an ordinary accountant.
Managerial and financial accounting is important in businesses today and their importance should not be understated. They provide useful guidelines and tools for analysis and decision purposes. Wrong decisions may cost a great deal to organizations and allow competitors to take over. However, if these accounting methods are used appropriately they may provide significant benefits to companies. External users of accounts may find it useful to use these accounts to project the performance of these companies and make better investment decisions. CMA qualified accountants may be able to use the financial statements in a better way; thus, it is no surprise that companies are willing to pay higher salaries to those individuals to avail their services. Being a CMA qualified accountant would not just ensure a higher pay and better job but it would also increase the individual’s market worth and would allow him/her to be more occupationally mobile.
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Hoyle, J., & Heisinger, K. (2013). Managerial Accounting. -: Flat World Knowledge.
Loo, I. D., Verstegen, B., & Swagerman, D. (2011). Understanding the roles of Management Accountants. European Business Review, 23(3), 287-313.
Users of Financial Statements. (n.d.). Users of Financial Statements. Retrieved April 16, 2014, from http://finance.mapsofworld.com/financial-report/statement/users.html