How useful are the accounting systems in decision making?

1.      Introduction

Both financial and management accounting are important when it comes to business. This is because businesses make use of accounting to determine future operational plans, to review previous performance, and to analyze present business functions. In the business setting, it can easily be observed that investors are not always directly concerned about the day-to-day business operations; instead they focus more on the investments being made and financial performance. On the other hand, managers needs accounting information in order to effect quick decisions on the daily business operations. Thus, it become clear that both managerial and financial accounting have different but inter-connected audiences. In the view of that, this paper will seek to analyze the differences between these two fields of accounting as well as present an understanding of how they work together.

2.      Understanding the difference between the fields of managerial and financial accounting

In the business setting, financial accounting is used to present the financial welfare of an organization to the external stakeholders. The audience of financial accounting include the board of directors, stockholders, investors, and financial institutes. The report presents financial information in specific period of time in the past and it provides the audience with the opportunity of visualizing how the company has performance during that period. On normal terms, financial accounting reports are done on annual basis, and for publicly traded companies – with the report being made part of a public record.

On the other hand, managerial or management accounting are normally adopted by managers for the purpose of decision making in relation to the daily operations that occur in the business. Such reports are not based on past performance, but instead on current and future trends. Since managers normally need to make operations decisions within a short period of time in normally fluctuating business environment, management account is mainly based on forecasting of market trends and doesn’t allow for exact numbers.

From the about discussion, the major difference between the two accounting fields thus emerge as; financial accounting deals with presenting the current position of the company to the public based on past performance, while managerial accounting deals with projecting the future position of a company based on present and expected future market trends.

3.      How useful are the accounting systems in decision making?

Table 1: differences between financial and management accounting in decision making process.

	Financial accounting	Managerial accounting
Users	Financial account reports are used by the stakeholders to evaluate the performance of the company. Such reports help them to on investment decisions in terms of whether or not to invest in a company.	This form of account is mainly used by managers and business operators. They use it to determine how to positively influence the performance of the company and ensure financial sustainability in the long-run.
Influence on decision	The influence on decision of users is very direct because this accounting system contains factual records. Thus, the users are directly pushed to accept or reject a given decision based on that report.	The influence on decision of users is a matter of probability as they users must align such report together with other business factors before deciding whether or not to use it.

Source as adapted from: Francis (2014)

In essence, when it comes to how useful management and financial accounting are during decision making process, management accounting can be analyzed as a field that is based on data collection, and conversion of this data into information which are later transformed into knowledge and the created knowledge will be used during the decision process. Atrill and McLaney (2012, pp. 32) further strengthened tis view by stating that management accounting does produce both financial and non-financial information that aid the management process of a company while financial accounting is more of an overview of the past. In line with this understanding, it ca be stated that both forms of accounting are inter-linked and function together. 

4.      Copying with managers that have little knowledge of accounting

Copying with managers that have little knowledge of accounting can be a very difficult task, but efficient and effective data system is one of the ways to do so. Efficiency and effectiveness of data systems does play vital role when it comes to creating and maintaining wide stream of managerial information. Mubarak (2013, pp. 7) made such emphasizes that it is important for managers to have the ability of differentiating knowledge, information and data. Additionally, the author made known that the way knowledge is acquired, stored, processed, distributed, and utilized does reflect the management accounting reports and the overall abilities of the company when it comes to meeting its set objectives. Thus, this paper is of the view that the best way that companies can cope with managers who have little accounting knowledge if by offering and encouraging continued education. This is because it is impossible for companies to remain competitive without timely data analysis and decision making.

5.      References

Atrill, P. & McLaney, E. (2012) Management Accounting for Decision Makers.7th ed.Harlow, England: Pearson Education Ltd.

Francis, K.A. (2014). The differences between financial accounting and management accounting. Available at: http://smallbusiness.chron.com/differences-between-financial-accounting-management-accounting-3985.html Accessed: 22-3-2015)

Mubarak, A. (2013) “Knowledge Management and Management Accounting Decisions – Experimental Study” Journal of Organizational Knowledge Management. [Online] Available: http://www.ibimapublishing.com/journals/JOKM/2013/607397/607397.pdf (Accessed: 22-3-2015)