Just as there are many types of economic decisions, there are also many types of accounting information. The terms financial accounting, management accounting often are used in describing three of accounting information that are widely used in the business community.
Financial Accounting refers to information describing the financial resources, obligations, and activities of an economic entity (either an organization or an individual). Accountants use the term financial position to describe an entity’s financial resources and obligations at a point in time and the term results of operations to describe its financial activities during the year.
Financial accounting information is designed primarily to assist investors and creditors in deciding where to place their scarce investment resources. Such decisions are important to society, because they determine which companies and industries will receive the financial resources necessary for growth..
Financial accounting information also is used by managers and in income tax returns. In fact, financial accounting information is used for so many different purposes that it often is called “general-purpose” accounting information.
Management Accounting involves the development and interpretation of accounting information intended specifically to assist management in operating the business. Managers use this information in setting the company’s overall goals, evaluating the performance of departments and individuals, deciding whether to introduce a new line of products, and making virtually all types of managerial decisions.
A company’s managers and employees constantly need information to run and control daily business operations. For example, they need to know the amount of money in the company’s bank accounts; the types, quantities, and dollar amounts of merchandise in the company’s warehouse; and the amounts owed to specific creditors. Much management accounting information is financial in nature but is organized in a manner relating directly to the decision at hand.