Accounting plays a very important role in decision making efforts in economic or financial systems. The definition of accounting itself is an information system designed to measure business activities, process data into report form, and communicate the results to management.
The main role of accounting is none other than to assist management tasks, especially in monitoring and planning functions. In general, accounting is related to financial matters to the activity of recording money.
However, in its application in the business world there are various types of accounting. Each has a different role and function. Some of the most common types of accounting known to the wider community are financial accounting and management accounting.
What are the differences between financial accounting and management accounting?
The basic difference between financial accounting and management accounting is the reporting orientation. In management accounting, reporting is oriented to internal parties, while in financial accounting, reporting is oriented to external parties.
Reporting from the book Cost Accounting (2019) by Firdaus A. Dunia and friends, management accounting is a field of accounting that is related to reporting financial information for internal company parties.
Internal parties include, among others
- top level company management
- middle level company management
- first level company management
On the other hand, financial accounting is a field of accounting that provides financial reporting addressed to external parties to the company.
External parties include, among others
- Shareholders
- Creditors
- Government
- And other parties who are not directly involved in the operations of a company
The differences are not only in terms of reporting but also in terms of understanding, scope, benefits, and others. Whatever it is, let’s have a look.
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Understanding Financial Accounting
Financial accounting is a type of accounting that is related to the preparation of financial reports for several external parties, such as shareholders, suppliers, creditors and other related parties.
The financial accounting system is generally intended to regulate various types of recording of transactions carried out by companies or organizations and to prepare financial reports of transactions that occur during one management period.
Basically, financial accounting is described as a form of presenting a company’s financial reports to external parties, both in the form of balance sheets, profit and loss reports, changes in capital, and cash flows to shareholders, creditors and investors. These matters relate specifically to the profitability and credibility of companies, suppliers and the government.
Objectives of Financial Accounting
The main function of financial accounting is to present financial information from an organization or company. The presentation of this information is generally made in the form of a report, so that related parties can see the financial condition of a company and everything that has happened within it.
Information regarding a company’s finances is very much needed, especially in management matters, because this can help make and make decisions, which will then influence and determine the company’s future condition.
The detailed objectives of implementing financial accounting are:
- To provide reliable information regarding changes in the net economic resources of a company that can arise from a company’s activities in order to gain profits.
- To present information regarding activities, liabilities and capital owned by the company.
- To assist the parties concerned in estimating a company’s potential in an effort to generate profits.
- Provides other important information, such as changes in the company’s economic resources and shopping activities.
- To disclose other information related to other financial reports that is relevant to meet the needs of users of these financial reports.
Benefits of Financial Accounting
Apart from having general and specific functions, financial accounting has its own role and benefits for the parties involved. The parties referred to include shareholders, investors, creditors, suppliers and the government.
So, here are some of the benefits of financial accounting for the parties concerned. Among them:
- For shareholders, financial accounting can be information that allows them to assess the company’s ability to pay dividends.
- Because capital investment is quite susceptible to risk in this area, investors will really need financial data information to assess whether the funds invested are feasible or not.
- As information for creditors to assess a company’s ability to pay service fees and return principal debt at maturity.
- As information for suppliers to assess whether the sales invoice provided will be paid by the company when it is due.
- For information regarding the determination of tax policies and national income statistical data by the government.
Users of Financial Accounting Reports
Users of financial accounting reports do not only include company parties. However, there are several other parties who are also users of this financial accounting report.
The following are users of financial accounting reports described in more detail:
- Investors
Investors or shareholders of course need information in an effort to determine whether an investment is worth giving or not. Considering that investing in capital is quite a risky activity in this field. Investors also need information that allows them to assess the company’s ability to pay dividends. Such information can be obtained from the details of existing financial accounting reports.
- Employees
Employees need information about the company’s stability and profitability. This is related to how they assess a company’s ability to provide services, post-employment benefits and other employment opportunities. - Lenders
Financial accounting reports can be used by lenders to decide whether loans and existing interest can be paid when due. - Suppliers as well as other business creditors
Financial reports are used by these groups in obtaining information that enables them to decide whether amounts owed will be paid when due. - Customers
The customers referred to here are interested parties involved in long-term agreements or dependent on the company. - Government
The government and its lower levels need information to regulate company activities, determine tax policies, and as a basis for compiling national income statistics and other statistics.
- The public
can be helped to see the latest trends and developments in the company’s prosperity and its series of activities through a company’s financial accounting reports.
With so many parties benefiting from financial accounting reports, it is very important that we know how to apply them.
Scope of Financial Accounting
In general, reports from financial accounting present financial information about a company as a whole, starting from the balance sheet (statement of financial position) which presents assets, profit and loss statements which present the results of activities of the company as a whole, liabilities (liabilities), capital, cash flow. and others.
Because the purpose of financial reports is for use by parties outside the company, in general the information contained in the report is in the form of a summary while still describing the company’s overall financial condition.
Financial Accounting Time Range
Financial accounting reports based on time spans are less flexible. Apart from that, the time period only covers certain periods, such as an annual period , half a year (interim) , a quarter period, or a month period.
Financial Accounting Information Focus
The focus of financial accounting information is centered on past information. The overall focus of this information can provide an overview of the form of responsibility of a company’s management for managing company funds.
Types of Financial Accounting Information
Financial accounting basically only measures financial management data which is guided by the applicable Financial Accounting Standards (SAK).
This is quite different from management accounting which not only measures finances and operations, but also includes information on physical measurements of processes, suppliers , technology, competitors and also customers.
The Nature of Financial Accounting Information
The nature of information from financial accounting can be described as a high level of precision, objective, accurate, and can be verified. This is because the users are parties from outside the company who use these financial reports as consideration in making decisions.
Companies also sometimes use the services of independent third parties, namely auditors, to obtain a level of accuracy and opinion about the company’s financial reports.
Understanding Management Accounting According to Experts
If financial accounting is usually used by people outside a company or organization, management accounting is used by people within a company or organization. To be clearer, here are several definitions of management accounting according to experts.
- Halim and Supomo
Halim and Supomo stated that management accounting is an activity that produces financial information in management as a basis for making decisions in carrying out the management function.
- Mulyadi
According to Mulyadi, management accounting is the presentation of financial information produced by a type of management accounting and utilized by an entity’s internal users.
- Charles T. Homgren
According to Charles T. Homgren, management accounting is a process of identifying, accumulating, measuring, analyzing, interpreting, preparing and communicating information that can help executives fulfill organizational goals. - Hariadi (2002)
Hariadi states that management accounting is a process of identifying, measuring, collecting, analyzing, recording, interpreting, and reporting economic events in a business entity which aims to enable management to carry out planning, control and decision making functions. - Abdul Halimdan Bambang Supomo
According to Abdul Halimdan Bambang Supomo, management accounting is an activity or process that produces financial information for management in making economic decisions in an effort to carry out management functions.
Application of Management Accounting
In general, management accounting also presents a number of information in the form of financial reports, but is more related to historical data in carrying out management processes which include many things, starting from planning, organizing, directing, controlling and evaluating work.
Furthermore, existing financial reports will be submitted to related parties for further analysis. These parties consist of top management, financial managers , production managers, and marketing managers.
These parties manage several aspects of the company related to the areas they are responsible for. In the analysis process itself, accurate analysis is needed so that management can make the right decisions for the company.
Therefore, management accounting financial reports must be made more detailed and detailed so that the information provided to superiors can be as detailed as possible.
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Management Accounting Functions
The main function of management accounting is to present data and information related to historical data for management. The management accounting process itself consists of planning, organizing, controlling, directing and assessing performance. The following is a more detailed description of the management accounting function.
- As a support for achieving company goals.
Basically, management accounting functions as a guide in planning operational activities related to the budget in accordance with basic budgeting concepts. This report contains the costs that must be incurred for core production activities up to the overhead costs that must be paid to support all these operational activities. .
- As a means of identifying and measuring performance,
management must of course identify, measure and report financial information to the directors and company owners in the form of systematic, transparent and detailed financial reports that have been prepared by the management accounting department. This will determine the location of the central points of the parties in an organization or company. Such as calculating product costs, activity costs, and the costs of each department.
- As a report presenter in one business unit,
management must also carry out a management process which includes planning, organizing, directing and controlling costs and prices. Management accounting can help companies maintain and control their company resources.
- As a provider of data to increase the number of sales,
management accounting generally provides sufficient internal data needed by the company so that it can lead to an increase in the number of sales. Management accounting only covers the company’s internal system, but the impact or effects it has on the company are broad enough to include the whole company. - As a controller of the use of company resources,
management accounting can help management control the use of existing financial resources in company activities more efficiently and effectively. Management accounting also plays a role as a controller of integrated cooperation with other functions, such as research and research, production , marketing, to human resources.
Scope of Management Accounting
The scope of management accounting tends to be narrower, where the scope no longer focuses on the company as one entity but is more detailed.
Because the scope of information aims to report on certain parts of the company, such as production, marketing, and others. However, the complexity of the scope of financial information produced by Management Accounting will be in line with the level of management involved in the decision-making process.
However, in its application, management accounting does not only rely on one scientific discipline, namely accounting, but also applies the scientific discipline of management in an effort to overcome and manage company resources and time.
Management accounting also uses the discipline of social psychology, especially in the process of estimating, forecasting and forecasting for product sales and human resource control.
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Management Accounting Conclusion
In general, management accounting focuses on providing financial information for the needs of internal company or management parties.
Management accounting presents financial reports that are prepared in such a way as to produce information that is useful in making decisions by management more effectively, which can take the form of planning and controlling operational activities and calculating costs.
The information produced from management accounting will be used as evaluation material and a means of decision making for a company.
Management accounting produces information that will help management, such as managers, executives, sales , administrative employees, or supervisors to make decisions related to company policies, both for planning, organizing, directing and controlling, as well as making decisions related to internal policies. company and concerns the period of the company.
Management accounting will always collect information that is relevant in making decisions and is estimated because decision making will always concern the future of the company.