Difference Between Financial and Managerial Accounting (Financial Accounting Vs Managerial Accounting):

Learning objectives of this article:

Compare and contrast financial and managerial accounting. What is difference between financial and managerial accounting?

Financial accounting reports are prepared for the use of external parties such as shareholders and creditors, whereas managerial accounting reports are prepared for managers inside the organization. This contrast in basic orientation results in a number of major differences between financial and managerial accounting, even though both financial and managerial accounting often rely on the same underlying financial data. In addition to the to the differences in who the reports are prepared for, financial and managerial accounting also differ in their emphasis between the past and the future, in the type of data provided to users, and in several other ways. These differences are discussed in the following paragraphs.

Emphasis on the Future:

Since planning is such an important part of the manager's job, managerial accounting has a strong future orientation. In contrast, financial accounting primarily provides summaries of past financial transactions. These summaries may be useful in planning, but only to a point. The future is not simply a reflection of what has happened in the past. Changes are constantly taking place in economic conditions, and so on. All of these changes demand that the manager's planning be based in large part on estimates of what will happen rather than on summaries of what has already happened.

Relevance of Data:
Financial accounting data are expected to be objective and verifiable. However, for internal use the manager wants information that is relevant even if it is not completely objective or verifiable. By relevant, we mean appropriate for the problem at hand. For example, it is difficult to verify estimated sales volumes for a proposed new store at good Vibrations, Inc., but this is exactly the type of information that is most useful to managers in their decision making. The managerial accounting information system should be flexible enough to provide whatever data are relevant for a particular decision.

Less Emphasis on Precision:

Timeliness is often more important than precision to managers. If a decision must be made, a manager would rather have a good estimate now than wait a week for a more precise answer. A decision involving tens of millions of dollars does not have to be based on estimates that are precise down to the penny, or even to the dollar. In fact, one authoritative source recommends that, "as a general rule, no one needs more than three significant digits., this means, for example, that if a company's sales are in the hundreds of millions of dollars, than nothing on an income statement needs to be more accurate than the nearest million dollars. Estimates that accurate to the nearest million dollars may be precise enough to make a good decision. Since precision is costly in terms of both time and resources, managerial accounting places less emphasis on precision than does financial accounting. In addition, managerial accounting places considerable weight on non monitory data, for example, information about customer satisfaction is tremendous importance even though it would be difficult to express such data in monitory form. Tag Cloud

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Segments of an Organization:
Financial accounting is primarily concerned with reporting for the company as a whole. By contrast, managerial accounting forces much more on the parts, or segments, of a company. These segments may be product lines, sales territories divisions, departments, or any other categorizations of the company's activities that management finds useful. Financial accounting does require breakdowns of revenues and cost by major segments in external reports, but this is secondary emphasis. In managerial accounting segment reporting is the primary emphasis.

Generally Accepted Accounting Principles (GAAP):

Financial accounting statements prepared for external users must be prepared in accordance with generally accepted accounting principles (GAAP). External users must have some assurance that the reports have been prepared in accordance with some common set of ground rules. These common ground rules enhance comparability and help reduce fraud and misrepresentations, but they do not necessarily lead to the type of reports that would be most useful in internal decision making. For example, GAAP requires that land be stated at its historical cost on financial reports. However if, management is considering moving a store to a new location and then selling the land the store currently sits on, management would like to know the current market value of the land, a vital piece of information that is ignored under generally accepted accounting principles (GAAP).

Managerial Accounting

Not Mandatory:

Financial accounting is mandatory; that is, it must be done. Various out side parties such as Securities and exchange commission (SEC) and the tax authorities require periodic financial statements. Managerial accounting, on the other hand, is not mandatory. A company is completely free to do as much or as little as it wishes . No regularity bodies or other outside agencies specify what is to be done, for that matter, weather anything is to be done at all. Since managerial accounting is completely optional, the important question is always, "Is the information useful?" rather than, "Is the information required?"

Summary:
Financial Accounting
Reports to those outside the organization owners, lenders, tax authorities and regulators. Emphasis is on summaries of financial consequences of past activities. Objectivity and verifiability of data are emphasized. Precision of information is required. Only summarized data for the entire organization is prepared.

Managerial Accounting
Reports to those inside the organization for planning, directing and motivating, controlling and performance evaluation. Emphasis is on decisions affecting the future.

Relevance of items relating to decision making is emphasized. Timeliness of information is required.

Detailed segment reports about departments, products, customers, and employees are prepared. Need not follow Generally Accepted Accounting Principles (GAAP). Not mandatory.

Must follow Generally Accepted Accounting Principles (GAAP). Mandatory for external reports.

Financial accounts - overview There are two main forms of accounting information: (1) Financial Accounts, and (2) Management Accounts Financial Accounts - A Definition Financial accounts are concerned with classifying, measuring and recording the transactions of a business. At the end of a period (typically a year), the following financial statements are prepared to show the performance and position of the business: Profit and Loss Account Balance Sheet Cash Flow Statement Notes to the Accounts Also known as the income statement. Describing the trading performance of the business over the accounting period Statement of assets and liabilities at the end of the accounting period (a "snapshot") of the business Describing the cash inflows and outflows during the accounting period

Additional details that have to be disclosed to comply with Accounting Standards and the Companies Act Description by the Directors of the performance of the business during the Directors' Report accounting period + various additional disclosures, particularly in relation to directors' shareholdings, remuneration etc Financial accounts are geared towards external users of accounting information. To answer their needs, financial accountants draw up the profit and loss account, balance sheet and cash flow statement for the company as a whole in order for users to answer questions such as: - "Should I invest my money in this company?" - "Should I lend money to this business?" - "What are the profits on which this company must pay tax?" Company Law Requirements for Financial Accounts Every UK company registered under the Companies Act is required to prepare a set of accounts that give a true and fair view of its profit or loss for the year and of its state of affairs at the year end. Annual accounts for Companies Act purposes generally include: - A directors report - An audit report - A profit and loss account

- A balance sheet - A statement of total recognised gains and losses - A cash flow statement - Notes to the accounts If the company is a "parent company", (in other words, the company also owns other companies - subsidiaries) then "consolidated accounts" must also be prepared. Again there are exceptions to this requirement (see consolidated accounts). Comparative figures should also be given for almost all items and analysis given in the year end financial statements. Exceptions to this rule are given individually. For example, there is no requirement to give comparative figures for the notes detailing the movements in the year on fixed asset or reserves balances.

Social accounting
From Wikipedia, the free encyclopedia Jump to: navigation, search Social accounting (also known as social and environmental accounting, corporate social reporting, corporate social responsibility reporting, non-financial reporting, or sustainability accounting) is the process of communicating the social and environmental effects of organizations' economic actions to particular interest groups within society and to society at large.[1] Social accounting is commonly used in the context of business, or corporate social responsibility (CSR), although any organisation, including NGOs, charities, and government agencies may engage in social accounting. Social accounting emphasises the notion of corporate accountability. D. Crowther defines social accounting in this sense as "an approach to reporting a firms activities which stresses the need for the identification of socially relevant behaviour, the determination of those to whom the company is accountable for its social performance and the development of appropriate measures and reporting techniques."[2] Social accounting is often used as an umbrella term to describe a broad field of research and practice. The use of more narrow terms to express a specific interest is thus not uncommon. Environmental accounting may e.g. specifically refer to the research or practice of accounting for an organisation's impact on the natural environment. Sustainability accounting is often used to express the measuring and the quantitative analysis of social and economic sustainability.

Contents

1 Purpose o 1.1 Accountability vs Authority Enjoyed o 1.2 Management control 2 Scope o 2.1 Formal accountability o 2.2 Self-reporting and third party audits o 2.3 Reporting areas o 2.4 Audience 3 Environmental accounting 4 Applications o 4.1 Format 5 History 6 See also 7 Notes 8 External links

[edit] Purpose
Social accounting challenges conventional accounting, in particular financial accounting, for giving a narrow image of the interaction between society and organizations, and thus artificially constraining the subject of accounting. Social accounting, a largely normative concept, seeks to broaden the scope of accounting in the sense that it should:

concern itself with more than only economic events; not be exclusively expressed in financial terms; be accountable to a broader group of stakeholders; broaden its purpose beyond reporting financial success.

It points to the fact that companies influence their external environment ( some times positively and many a times negatively) through their actions and should therefore account for these effects as part of their standard accounting practices. Social accounting is in this sense closely related to the economic concept of externality. Social accounting offers an alternative account of significant economic entities. It has the "potential to expose the tension between pursuing economic profit and the pursuit of social and environmental objectives".[3] The purpose of social accounting can be approached from two different angles, namely for management control purposes or accountability purposes.

[edit] Accountability vs Authority Enjoyed

Social accounting for accountability purposes is designed to support and facilitate the pursuit of society's objectives. These objectives can be manifold but can typically be described in terms of social and environmental desirability and sustainability. In order to make informed choices on these objectives, the flow of information in society in general, and in accounting in particular, needs to cater for democratic decision-making. In democratic systems, Gray argues, there must then be flows of information in which those controlling the resources provide accounts to society of their use of those resources: a system of corporate accountability.[4] Society is seen to profit from implementing a social and environmental approach to accounting in a number of ways, e.g.:

Honoring stakeholders' rights of information; Balancing corporate power with corporate responsibility; Increasing transparency of corporate activity; Identifying social and environmental costs of economic success.

[edit] Management control

Social accounting for the purpose of management control is designed to support and facilitate the achievement of an organization's own objectives. Because social accounting is concerned with substantial self-reporting on a systemic level, individual reports are often referred to as social audits. Organizations are seen to benefit from implementing social accounting practices in a number of ways, e.g.:[5]

Increased information for decision-making; More accurate product or service costing; Enhanced image management and Public Relations; Identification of social responsibilities; Identification of market development opportunities; Maintaining legitimacy.

According to BITC the "process of reporting on responsible businesses performance to stakeholders" (i.e. social accounting) helps integrate such practices into business practices, as well as identifying future risks and opportunities.[6] The management control view thus focuses on the individual organization. Critics of this approach point out that the benign nature of companies is assumed. Here, responsibility, and accountability, is largely left in the hands of the organization concerned.[7]

[edit] Scope
[edit] Formal accountability

In social accounting the focus tends to be on larger organisations such as multinational corporations (MNCs), and their visible, external accounts rather than informally produced accounts or accounts for internal use. The need for formality in making MNCs accountability is given by the spatial, financial and cultural distance of these organisations to those who are affecting and affected by it.[8] Social accounting also questions the reduction of all meaningful information to financial form. Financial data is seen as only one element of the accounting language.[9]

[edit] Self-reporting and third party audits

In most countries, existing legislation only regulates a fraction of accounting for socially relevant corporate activity. In consequence, most available social, environmental and sustainability reports are produced voluntarily by organisations and in that sense often resemble financial statements. While companies' efforts in this regard are usually commended, there seems to be a tension between voluntary reporting and accountability, for companies are likely to produce reports favouring their interests.[10] The re-arrangement of social and environmental data companies already produce as part of their normal reporting practice into an independent social audit is called a silent or shadow account. An alternative phenomenon is the creation of external social audits by groups or individuals independent of the accountable organisation and typically without its encouragement. External social audits thus also attempt to blur the boundaries between organisations and society and to establish social accounting as a fluid two-way communication process. Companies are sought to be held accountable regardless of their approval.[11] It is in this sense that external audits part with attempts to establish social accounting as an intrinsic feature of organisational behaviour. The reports of Social Audit Ltd in the 1970s on e.g. Tube Investments, Avon Rubber and Coalite and Chemical, laid the foundations for much of the later work on social audits.[12]

[edit] Reporting areas

Unlike in financial accounting, the matter of interest is by definition less clear-cut in social accounting; this is due to an aspired all-encompassing approach to corporate activity. It is generally agreed that social accounting will cover an organisation's relationship with the natural environment, its employees, and ethical issues concentrating upon consumers and products, as well as local and international communities. Other issues include corporate action on questions of ethnicity and gender.[8]

[edit] Audience
Social accounting supersedes the traditional audit audience, which is mainly composed of a company's shareholders and the financial community, by providing information to all of the organisation's stakeholders. A stakeholder of an organisation is anyone who can influence or is influenced by the organisation. This often includes, but is not limited to, suppliers of inputs, employees and trade unions, consumers, members of local communities, society at large and

governments.[13] Different stakeholders have different rights of information. These rights can be stipulated by law, but also by non-legal codes, corporate values, mission statements and moral rights. The rights of information are thus determined by "society, the organisation and its stakeholders".[14]

[edit] Environmental accounting

Environmental accounting, which is a subset of social accounting, focuses on the cost structure and environmental performance of a company. It principally describes the preparation, presentation, and communication of information related to an organisations interaction with the natural environment. Although environmental accounting is most commonly undertaken as voluntary self-reporting by companies, third-party reports by government agencies, NGOs and other bodies posit to pressure for environmental accountability. Accounting for impacts on the environment may occur within a companys financial statements, relating to liabilities, commitments and contingencies for the remediation of contaminated lands or other financial concerns arising from pollution. Such reporting essentially expresses financial issues arising from environmental legislation. More typically, environmental accounting describes the reporting of quantitative and detailed environmental data within the non-financial sections of the annual report or in separate (including online) environmental reports. Such reports may account for pollution emissions, resources used, or wildlife habitat damaged or reestablished. In their reports, large companies commonly place primary emphasis on eco-efficiency, referring to the reduction of resource and energy use and waste production per unit of product or service. A complete picture which accounts for all inputs, outputs and wastes of the organisation, must not necessarily emerge. Whilst companies can often demonstrate great success in eco-efficiency, their ecological footprint, that is an estimate of total environmental impact, may move independently following changes in output. Legislation for compulsory environmental reporting exists in some form e.g. in Denmark, Netherlands, Australia and Korea. The United Nations has been highly involved in the adoption of environmental accounting practices, most notably in the United Nations Division for Sustainable Development publication Environmental Management Accounting Procedures and Principles (2002).

[edit] Applications
Social accounting is a widespread practice in a number of large organisations in the United Kingdom. Royal Dutch Shell, BP, British Telecom, The Co-operative Bank, The Body Shop, and United Utilities all publish independently audited social and sustainability accounts.[15][16][17][18][19][20] In many instances the reports are produced in (partial or full) compliance with the sustainability reporting guidelines set by the Global Reporting Initiative (GRI).

Traidcraft plc, the fair trade organisation, claims to be the first public limited company to publish audited social accounts in the UK, starting in 1993.[21][22] The website of the Centre for Social and Environmental Accounting Research contains a collection of exemplary reporting practices and social audits.

[edit] Format
Companies and other organisations (such as NGOs) may publish annual corporate responsibility reports, in print or online. The reporting format can also include summary or overview documents for certain stakeholders, a corporate responsibility or sustainability section on its corporate website, or integrate social accounting into its annual report and accounts.[6] Companies may seek to adopt a social accounting format that is audience specific and appropriate. For example, H&M, asks stakeholders how they would like to receive reports on its website; Vodafone publishes separate reports for 11 of its operating companies as well as publishing an internal report in 2005; Weyerhaeuser produced a tabloid-size, four-page minireport in addition to its full sustainability report.[23]

[edit] History
Modern forms of social accounting first produced widespread interest in the 1970s. Its concepts received serious consideration from professional and academic accounting bodies, e.g. the Accounting Standards Board's predecessor, the American Accounting Association and the American Institute of Certified Public Accountants.[24][25][26] Business-representative bodies, e.g. the Confederation of British Industry, likewise approached the issue.[27] Abt Associates, the American consultancy firm, is one of the most cited early examples of businesses that experimented with social accounting. In the 1970s Abt Associates conducted a series of social audits incorporated into its annual reports. The social concerns addressed included "productivity, contribution to knowledge, employment security, fairness of employment opportunities, health, education and self-development, physical security, transportation, recreation, and environment".[28] The social audits expressed Abt Associates performance in this areas in financial terms and thus aspired to determine the company's net social impact in balance sheet form.[29] Other examples of early applications include Laventhol and Horwath, then a reputable accounting firm, and the First National Bank of Minneapolis (now U.S. Bancorp).[30] Yet social accounting practices were only rarely codified in legislation. The French bilan social and the British 2006 Companies Act poses a significant exception.[31][32] Interest in social accounting cooled off in the 1980s and was only resurrected in the mid-1990s, partly nurtured by growing ecological and environmental awareness.[33]