Analysing the performance of the business is vital for a company’s financial managers. To analyse it correctly, managers use different types of accounting. Those different types include financial accounting and managerial accounting. The other types of accounting are auditing and tax accounting. The purpose and application of these four types of accounting are different. Today’s article will only discuss financial accounting and managerial accounting.
There will be a mention of the uses and applications of both types of accounting. Before that, let’s start our discussion with the definition of both accounting types.
What Is Financial Accounting?
This type of accounting deals with the financial transitions of the company. This process involves recording, analysing and reporting the company’s transactions in the form of financial statements. Balance sheets, income statements, and cash flow statements result from this type of accounting process. Financial accounting is crucial for a company’s financial health. It is because the company’s investors and shareholders use these statements to assess its financial stability.
What Is Managerial Accounting?
The second type of accounting is managerial accounting. This type of accounting centres on the internal needs of the business. It involves the collection of financial data and making informed decisions based on that data. The internal managers prepare reports for the stakeholders and investors, telling them about the company’s overall condition. Also, managerial accountants aid strategic planning because this type of accounting is all about the future. They aid the major shareholders and board in making informed decisions based on the available data.
Uses And Applications Of Financial Accounting
Experts of a finance dissertation writing service have explained that financial accounting is an important type of accounting needed to know about the company’s financial health. Based on its importance, a few uses and applications of this type of accounting are as follows;
Making Income Statements
Income statements are important to know about the company’s income and expenses. Financial accounting helps the managers to report the outcome of different business operations in the form of monetary. A company’s income statement is also called the profit and loss statement. As the name tells, it reports whether the company is going in profit or loss during a specific period of the year. Multinational companies publicise their income statement to attract more investors and shareholders. Thus, this type of accounting is used to create income statements.
Creating Balance Sheet
A balance sheet tells about the company’s financial position for a specified period. Financial accounting helps a lot in making this sheet. The financial managers or accountants make this sheet quarterly or monthly and publicise its information. A balance sheet contains the status of the company’s assets and liabilities. It also includes details about the inventory and fixed and liquid assets. All this information is critical in determining the solvency and liquidity of any company. Also, do not forget that you can do all this using financial accounting methods and techniques.
Determining The Financial Ratios
Upon the creation of financial statements by using financial accounting, the financial ratios are computed. In simple words, you can say that financial ratios are also linked to this accounting type. These ratios tell the investors and shareholders how well the company is positioned to continue its operations. You can also measure the liquidity ratios using financial accounting. The ability of a business to pay its short-term debt when it is due is measured by liquidity. The term “solvency” refers to a company’s ability to satisfy its long-term debt obligations. Hence, these ratios are crucial in establishing a company’s financial health.
Uses And Applications Of Managerial Accounting
Like financial accounting, managerial accounting also has its own uses. There are a number of ways in which this type of accounting can be used to solve the company’s problems. A brief description of all the applications is as follows;
Planning, Forecasting and Budgeting
One major use of this type of accounting is its powerful ability to forecast things. The managers can easily plan, forecast and budget different things. With the help of this accounting, managers can successfully project the company’s financial trajectory for the upcoming months. Such plans mostly involve the projection of revenues and costs based on the available financial data. Now, to do this high-level planning, you also need some kind of budgeting. The budgeting details the cost of any investment you will make in the near future to execute the plan. For example, Mr Frank’s client tells you that his client is not going to buy any product after this month. Now, you will sit and plan things to retain the client and think of the possible solutions. This all comes under managerial accounting.
Not every product of a company provides the desired revenue. There are some flagship products and services that generate most of the revenue. So, managerial accounting enables you to relook at your money-making products and services. The data helps you analyse where your product is currently standing in the market. You predict the sales trends in the upcoming months and years based on that data. Also, you see whether your product is targeted at the right audience or not. If not, it helps you redirect to the right audience. Hence, managerial accounting equips you with the tools to make sales trends and narrow down the potential prospects.
Project Management Decisions
This type of accounting enables the managers to perform a cost-benefit analysis for new projects. It helps in generating reports on ongoing projects. The new projects might involve significant outlays of cash as well as new debt to finance them. To deliver the projects within your budget, managerial accounting helps you. Along with the budget, it also ensures that projects are delivered within time. Hence, it helps in making project management decisions.
To summarise, managerial and financial accounting are two key pillars that create sustainable operations for a company. By considering the data, both these types of accounting analyse the financial data of a company. Also, the analysis done by both accounting types is crucial for the company’s health.