Can you think of a possible reason for distinguishing accounting into financial and managerial accounting?
A suggested answer to practice activity 1.3
The emergence of joint-stock companies brought about the need to provide valuable financial accounting information to capital providers. Investors and creditors needed to have financial accounting information to ascertain their return on investment and the ability of a company to repay debts when due. Also, company managers needed accounting information for decision-making.
Another objective of presenting accounting information to capital providers is to account for managements' deployment of the reporting entity's resources. Accounting information presented to external users is aggregated.
Managers use accounting information to measure their performance (generating sufficient profit) for a reporting entity. Managerial accounting is more suitable for internal decision-making by managers in a reporting entity. A typical financial statement prepared for internal use by a reporting entity depicts revenue from different divisions, expenses incurred in generating the revenue from the various divisions, and the assets employed by other divisions in generating revenue. Accounting information for internal use in a business entity is more detailed.
It is impossible to present accounting information in a way that suits the external users (that is, investors and creditors) and internal users (that is, managers) simultaneously. Therefore, the distinction of accounting into financial and managerial aspects becomes crucial to meet the respective users' needs.
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