Question

Briefly discuss the differences between Financial and Management Accounting, and then critically discuss why do you think Financial Accounting statements are prepared following Generally Accepted Accounting Principles, while Management Accounting reports do now follow any such rules.

20 marks

Answer 1

Part 1 Difference between Financial Accounting & Managerial Accounting:

Sr No	Basis	Financial Accounting	Managerial Accounting
1	Focus	Financial accounting focuses on the company as a whole & the reporting is done the whole company's performance	Managerial Accounting focuses on the sub unit within the entity & forecasts the business prediction.
2	Adherence to GAAP	Financial statements must follow rules of GAAP	Managerial Accounting never follow rules of GAAP
3	Statements prepared	Income statement, Balance sheet, Statement of cashflow	Budgets, Cost-benefit Analysis, etc.
4	Information	Theses statements provide monetary information.	These provide the user with both financial & non-financial information.
5	Users	Financial statements useful to external users such as stockholders, Government agencies, lenders, etc	Managerial Accounting is generally done for the internal sub unit's performance appraisal & forecasts, hence these are much useful to managers, internal management, internal audit department, etc.
6	Accounting standards	Accounting standards must be strictly followed.	Accounting standards are not applicable.

Part 2: Why do Management Accounting reports do now follow GAAP?

GAAP are issued by the Financial Accounting Standards Board (FASB) considering the essence of improving clarity, consistency, & comparability of financial statements prepared by different entities. GAAP comprises of common set of accounting principles, standards & procedures & hence is a common way of recording & reporting the financial information which helps external users understand the communication of financial information by the companies. Hence GAAP must be followed by public companies in the US. Whereas users of managerial accounting statements are within the entity, hence do not require such adherence to commonly accepted way of recording & reporting. Therefore, these statements do not follow GAAP.

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