Managerial Accounting Practices DQ

Posted: November 26th, 2013

Managerial Accounting Practices DQ

Managerial accounting and financial accounting are both techniques applied in business organizations for the purposes of financial appraisal and analysis. The former is used for the provision of financial data and information to the internal employees of a given business setting, majorly the executive body. Financial accounting on the other hand is used for the external environment business players like shareholders and potential investors. Although both systems tend to generate similar financial record, there are some noted distinctions between them. Financial accounting is legally mandated in accordance to company regulations for the generation of monetary statements on a yearly basis. Additionally, these financial records must conform to the preset accounting techniques recorded and regulated by the General Accepted Accounting Practices (GAAP) body (Vallabh, 2006). Managerial accounting is more flexible in that it offers an option regarding monetary statements, where the company in its own discretion may or may not prepare such. Should a company choose to generate managerial accounting records, it is exempted from the accounting formalities and limitations required in financial accounting. Therefore, any accounting techniques may be used in preparation of such documents.

In financial accounting, the monetary documents are prepared on an annual basis while in managerial accounting the documents are generated as precedence dictates, daily, weekly, fortnightly, monthly, quarterly, or annually. The frequency applied in generation of financial documents in managerial accounting is geared towards enabling the executive body in informed decision-making techniques that accord superior decisions. Note that, as financial accounting targets external business players, it composes a comprehensive general document that is holistic in nature covering the whole organization (Vallabh, 2006). Additionally, the financial overviews are based on past events covering the last reported period to the present. This is very useful for current and potential investors. Managerial accounting on the other hand is rather particular and tends to focus on defined targets such as a given service or department for its enhancement. The information covered therefore consists of the past, present and futuristic assessments of the given issue to aid in goal setting.

Due to the varied nature of the targets and information relayed in both types of accounting, different types of reports are used in both practices. Beginning with managerial accounting, the first report is termed as a cost report. As the name suggests, a cost report records the cost of raw materials before the production process and any other expenses like labor, transport, and packaging used in the manufacturing process (Needles, Marian & Susan, 2007). The resulting figure is considered as the total production cost for a given product. Dividing the total cost of production by the produced quantity computes the cost of a single item. This aids the management team in prudent decision making towards the calculation of the selling price for purposes of profit making and business continuity. Budgets are the second type of reports generated for management accounting. Business resources have to be purchased and this requires finances. Good business practices require planning for the creation of a financial base that is able to sustain the required obligations that a business has. Budgets combine past monetary allocations and future goals for the creation of the subsequent financial requirements.

The management team appraises a given budget by comparing the amount of revenue and other assets in possession in a bid to ensure that planning is accorded within their capability level. Overstretching a business in terms of credit leads to lower profits and bankruptcy. To ensure business continuity, the executive members have to plan wisely and reduce on unnecessary costs for higher profitability. Performance reports are used for business appraisal purposes by comparing the planned activities and their manner and period of execution. They are also used in assessing whether proposed projects and targets have been met within the pre-allocated period and their status to determine the level of success. When managers determine that a given requirement is lagging behind, they are able to infuse corrective measures and propel the business back to its set focus. Inventory reports are applied in assessing resource allocation and the ascertaining the delivery of ordered production materials (Needles et al., 2007). This ensures the elimination of wastes in the business leading to effectual production and higher profitability. It also ensures that management overcomes the problem of shortages that are very costly to the organization.

In financial accounting, the first record is the balance sheet that allows an individual to assess the financial position of an organization by the documentation of the business’ assets, liabilities and ownership capital. Through this, shareholders are able to assess the viability of the business investment with regard to competitors and the success level. The second report is the cash flow statement that records all the capital sources of the company like revenue, long and short-term loans, salvaging value of assets, among others, and the amount allocated and used by the various components (Needles et al., 2007). These overheads include loan repayments, asset purchases, and business losses. By comparing both inflows and outflows, the profitability level is computed and financial positioning ascertained. Similar to this is the income statement that majorly keeps a record of all incomes (revenues) made towards the business and all the expenses (overheads) that the organization makes. The difference between the two figures indicates the profits or losses made by the business within a given period. Lastly, the statement of capital denotes the monetary shares an individual in a given business. All reports are used by shareholders in assessing the growth, dormancy or loss on their investments to aid in proper decision making as to whether more or less investments should be made.

References

Needles, B. E., Marian, P., & Susan, V. S. (2007). Financial and Managerial Accounting. Independence, KY: Cengage Learning.

Vallabh, P. (2006). X-kit FET Grade 10 ACCOUNTING. Pinelands, Cape Town: Pearson South Africa.