Business is an economic activity taken up to earn proﬁts and to optimize the capital for the owners. A business cannot operate in seclusion. The main reasons for every business are producing profit; thereby, the business owners invest money and obtain various properties and assets to contribute revenue. He contracts different expenses and receives income from various sources in bargains with several persons in the procedure of buying and selling of goods.
In the ancient days, the business was small and simple, and very few transactions used to happen, and entrepreneurs used to remember the transactions by committing it to their memories. After the industrial revolution, business behavior has grown, and business activities have multiplied.
In reality, no business can keep in mind and remember a large number of business activities. In addition to that, the businessmen will be concerned with knowing what he owns and what he owes at the end of the year. How much profit has he gained? What is his financial position? To alleviate entrepreneurs from the stress of memorizing all the business activities, they are required to make a record of their dealings and transactions related to the expenses, assets, liabilities, and income.
Accounting is the process of collecting, recording, classifying, and summarizing financial data. In other words, wherever money is involved, accounting is required to account for it. Accounting is oftentimes called the language of business. The basic function of any language is to serve as a means of communication or a medium. Accounting takes place in this function.
According to Investopedia, Accounting has several branches to function for the needs of different people with varying information demands. These branches sometimes overlap, and they are oftentimes closely interlinked.
What is Financial Accounting
Financial accounting is the widest branch, and it is focused on the needs of external users. Financial accounting is mainly concerned with the endorsement, calculation, and communication of economic transactions and activities. This information is communicated in a whole set of financial statements. It is presumed under this branch that the users have one common information demand.
Financial accounting acknowledges accounting standards developed by standard-setting bodies. As the financial statements are normally for external use to the business, in order for them to be accepted, they are organized in accordance with standard guidelines such as the Generally Accepted Accounting Principles (GAAP).
Examples of these financial reports include:
- The balance sheet (statement of financial position)
- Income statement (the profit and loss account or what they call P&L)
- Statement of cash flows (summarizes the amount of cash and cash equivalents)
Financial accounting is mostly concerned with historical processing information. Although financial accounting commonly meets the demands of external users, internal users of accounting information also use this information for their decision-making demands.
What is Management Accounting
Management accounting highlights the preparation and analysis of accounting information within the organization. The objective of managerial accounting is to contribute appropriate and relevant information for those internal users of accounting information, such as the managers and employees in their decision-making demands. Often, these are sensitive information or data, and these are not allowed to be distributed to those outside the business. For example, the prices, the plan to open up branches, or customer list, etc.Managerial accounting includes cost analysis, budgeting and planning, financial analysis, evaluation of business actions, and other similar topics.