Analyzing the users of financial information
If we analyze the users of financial information then we can divide them in two broad categories:
- Internal users of financial information
- External users of financial information
Generally management is the internal user of financial information whereas all the other parties which are outside the organizational boundaries are referred as external users of financial information.
The needs of both kinds of users can be similar at one instance but mostly the internal users require much detailed information as they have to make crucial business decisions. Therefore, the information for internal users will be tailor made. Whereas, external users comprise of large audience and each group in external users can have different information needs. But business cannot provide tailor made information to each and every group of external users. Therefore, business provides such information in a generalized form that is capable of catering majority of the information needs of the external users. As information provided to external users is generalized and not specific therefore it is also referred as General Financial Information which can cater general information needs of general public.
But as information needs are different therefore the way financial information is gathered, processed and communicated will also be different. That is why for internal users of financial information we have Management Accounting and for general users or external users we have Financial Accounting.
Difference between Financial and Management Accounting
Following are the major difference between Financial Accounting and Management Accounting from different perspectives:
|Financial Accounting||Management Accounting|
|Legal requirements||Different types of organizations are bound to prepare financial accounts. For example, Companies are required to prepare General purpose financial statements||Management accounts are complete exception and are not required by International Accounting Standards. However, local laws may require certain organization to prepare management accounts.|
|Time Horizon||Financial information prepared under financial accounting relates to past and reports such events that relates to the period which have already passed.||Financial information under management accounting can spread over past, present and future. As management has to make decisions therefore management accounting is primarily focused on upcoming events i.e. future.|
|Presentation of information and framework for preparing information||Under financial accounting, information is produced under the rules laid down by local authorities and/or International Accounting Standards which suggest the format and accounting treatment as well.||Information prepared under Management Accounting is not governed by any accounting standards as management determines the format of information and accounting treatments.|
|Frequency of reporting||Financial accounts are prepared usually on annual basis however certain entities are required by law to prepare the financial accounts on quarterly and/or semi-annual basis.||As the information under management accounting is prepared for internal users therefore, information is prepared as and when it is required. Reports may be prepared on periodic basis as well as on adhoc basis.|
|Audience||Intended users of financial accounts or information prepared under financial accounting is general public at large and is prepared in such way that it can cater general needs||An intended user of management information is management and is prepared according to the requirements of the management keeping the specific needs in consideration. And the same information may be presented from different perspective.|
|Communication of Information||Information prepared under financial accounting is usually communicated in the form of financial statements which are made available to general public through printing and/or by publishing in news paper. This information is available to almost everybody without any restriction.||Management Information is communicated in different formats depending on the type of information for example, budgets, management accounts, contingency reports, memorandums and different internal reports. Management information is often of classified nature and is restricted to certain users even within an organization|