Management accounting is the task of the financial service of the enterprise: the financial manager or the financial director, but in many small and medium-sized companies, this function is assigned to the enterprise accountant. Financial accounting is regulated by documents and collects information necessary for the preparation of financial statements on the enterprise’s economic activities as a whole, for example, income and expenses and funds. Financial accounting is the foundation of management accounting. It considers the quantitative aspect of accounting objects of the enterprise, while managerial accounting considers their qualitative characteristics and efficiency of use. The management accounting system is formed to manage a specific company and is not regulated by mandatory norms and standards.
Management accounting is separated from financial accounting for objective reasons, particularly under the influence of competition, a trend towards an increase in the scale of business. It combines partly accounting and partly operational accounting. The purposes of using the information in management and financial accounting differ significantly. The main goal of management accounting is to improve the efficiency of the company’s business. The information reflected in management reports is usually available only to internal users. Managers of various levels use the management accounting system in their current work. This information, among other things, is necessary for making operational management decisions both for the company as a whole for a specific period and individual segments of activity, processes, products for different periods.
Financial and management accounting has several other differences. Firstly, the deadlines for filing reports in financial accounting are regulated by external institutions, and in management, they depend on the needs of internal users and are set by the company. Secondly, all information in financial accounting is displayed in monetary terms, and management accounting can operate in other quantitative, qualitative, probabilistic indicators. In addition, in financial accounting, only objective data are often used, and in management, along with actual indicators, estimates are also used. Finally, in management accounting, special attention is paid to the completeness, efficiency, and form of providing information in financial accounting – to reliability and compliance with legal requirements and standards.
Financial accounting provides clear information that is not subject to correction when presented in official reports. Government authorities can use the information to check the payment discipline of an organization in the area of taxes and fees. Financial accounting is intended to carry out, first of all, documentation, valuation, inventory, costing, and much more. Often the operating activities of the company depend on the financial indicators. For example, Starbucks’ performance slowed down by 2018, when the company took out a long-term loan and increased its investments in operating activities and investment while maintaining the number of dividends paid (Chuang, 2019). Financial indicators signaled a decrease in the company’s positive growth dynamics, which prompted a slight shift in the vector of development and planning in management accounting. Given the further global challenges associated with the pandemic, this decision had both a strictly positive impact on business development in this perspective and complicated the ratio of all assets to long-term liabilities (Macrotrends SBUX, 2021). In this regard, the reaction to such signals in financial accounting in the reflection of activities on managerial does not have the only correct decisions.
Financial indicators can also be a signal and a reflection of the activities of management accounting, which leads to the corresponding dynamics. Firstly, thoughtful planning of costs for the long term allows confidently determining the vector of development and significantly reduces risks. Secondly, at the same time, it is necessary to adhere to certain flexibility in management accounting due to the dependence on external factors. At the same time, far from always correct, management decisions yield results in the short term, reflecting more on its reputation and attractiveness to investors.
For example, the Coca-Cola Company, following global environmental and social responsibility trends, improved its operating profit margins through an internal program to reduce the cost of creating the final product (Brondoni, 2019). In fact, external factors drive the company’s activities towards environmental responsibility, and the right approach can turn this need into an advantage. At the same time, Coca-Cola maintains its economic reputation by maintaining dividends amid falling revenues (Macrotrends KO, 2021). The company deliberately borrowed money to maintain the annual growth rate of dividends for shareholders. This management decision, on the one hand, negatively affects financial accounting. However, the company remains attractive to new investors in the long term, including through its environmentally oriented activities. These events can help receive additional grants at the federal level, allocated to environmentally friendly companies.
As a result, both types of accounting are closely related, reflecting the complex perception of the entire company. We can say that both financial and management accounting has some common tasks, such as ensuring the target financial result of the company’s activities. Identifying internal reserves to ensure the company’s financial stability and determining the feasibility of business operations, resources, and control systems are also included in the target activities of each accounting, which is reflected in the above examples.
References
Brondoni, S. M. (2019). Shareowners, Stakeholders & the Global Oversize Economy. The Coca-Cola Company Case. Symphonya. Emerging Issues in Management, (1), 16-27. Web.
Chuang, H. J. (2019). Starbucks in the World. HOLISTICA–Journal of Business and Public Administration, 10(3), 99-110. Web.
Macrotrends – CocaCola Income Statement 2005-2021 | KO. Web.
Macrotrends – Starbucks Financial Ratios for Analysis 2005-2021 | SBUX. Web.