The fundamental economic issue of how and where to allocate scarce resources is an issue which society constantly faces. In an organization, there are multiple accounting tools which can be used in order to accurately predict and determine where to allocate resources properly. These accounting tools can be divided into multiple sectors, one being financial, and the other being managerial. These two accounting methods are used separately and provide unique perspectives based on an organizations internal and external information. (Drury, 2009)
Financial accounting and managerial accounting both provide substantial information to its users but in different forms. Financial accounting is used to produce high level summaries of an organization's overall financial performance for a specific period of time, while managerial accounting is a more forward-looking practice used to determine future decisions in an organization (Caplan, 1997). Both financial and managerial accounting are necessary tools that should be used in order to properly run a business, as they serve different, yet useful, purposes.
Users of financial accounting are usually entities outside of the organization. This may include investors, stock analysts, regulators, or anyone who may have an interest as a stakeholder for the given organization (Caplan, 1997). For example, financial accounting uses historical information, not because investors are interested in the past, but rather because it is easier for accountants and auditors to agree on what happened in the past than to agree on management’s predictions about the future. The past can be “audited.” Investors then use this information about the past to make their own predictions about the company’s future. (Drury, 2009)
Management accounting, on the other hand, serves an entirely different audience, with other needs. Managers need detailed information about their part of the organization, so management accounting provides detailed...