Financial Accounting may be defined as the science and art of recording and classifying business transactions and preparing summaries of the same transactions and preparing summaries of the same for determining profit or loss and the financial position of the concern. The object of is to find out the profitability and to provide information about the financial position of the concern. Its purpose is to provide information for others to the value of a company. It is concerned with record – keeping directed towards the preparation of Profit and Loss Account and Balance Sheet.
Managerial Accounting is concerned with the supply of information which is useful to management in decision making for the efficient running of the business and in minimizing profit. It is the process of identifying, measuring, analyzing and communicating information of an organization’s goal.
Differences between Financial Accounting and Managerial Accounting
1. It is used internally.
1. It is used for external stakeholders.
2. The time horizon is for historical information.
Example: – Managers and Employees.
2. The time horizon is for future projections.
Example: – Shareholder’s, Creditor’s, lender’s, banks and government.
3. It keeps the track of all the financial information of the entity.
3. It record’s and report’s both the financial and non-financial information of an entity.
4. It is regulated by the law. It is standardized.
4. It is regulated and established by the entrepreneur. It is not standardized.
5. To record the financial performance in a period and the financial position at the end of that period.
5. To aid planning, controlling and decision making.
6. Efficiency of financial accounting is to report on the profitability.
6. They report on specifically what is causing problem and how to fix them.
7. Nature of information is mostly financial.
7. Nature of information is financial and non-financial.
The two principal statements of financial accounting are: –
1. Income Statement or Statement of Profit and Loss
It shows the net results of the business operations i.e. net profit or loss during an accounting period.
2. Statement of Financial Position or Balance Sheet
It shows the nature and amount of assets, liabilities and capital of a business and indicates the financial position of the business at a particular date.
Two more Statement’s added in Financial Statement are: –
1. Statement of retained earning’s or profit and loss appropriate statement: –
It shows how the profit earned during the period has been utilized i.e., how much profit has been distributed as dividend on equity and preference share capital and how much profit has been transferred to general reserves. The balance of this account is shown in the balance sheet in Equity and Liabilities under the heading ‘Reserves and Surplus’.
2. Statement of changes in Financial position
It includes a Funds Flow Statement and a Cash Flow Statement. Funds flow statement shows the sources and applications of cash and cash equivalents during a period.
Objectives of preparing a Financial Statements
(i) To present a true and fair view of the financial performance (i.e. profit/ loss) of the business.
(ii) To present a true and fair view of the financial position (i.e. Assets/Equity and Liabilities) of the business.
Characteristics of Financial Statements
(i) They are related to past periods and hence are historical documents.
(ii) They are expressed in terms of money.
(iii) They show profitability through statement of profit and loss and financial position through balance sheet.
Managerial Accounting is the process of identification, measurement, accumulation, analysis, preparation and communication leading to managerial decisions. It is for internal planning and controlling responsible to: –
a) Customer’s for safe and defect free products and services.
b) Creditor’s for repaying principal and interest.
c) Employees for a safe and defect free products and services.
d) Supplier’s and vendors for timely payments.
e) Others: Government’s and Communities.