Just as there are many types of economic decisions, there are many types of accounting information. The terms financial accounting, management accounting, and tax accounting often are used in describing three types 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 entityâs financial resources and obligations at one 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, as they determine which companies and industries will receive the financial resources necessary for growth, and which will not.
Financial accounting information also is used in income tax returns. In fact, financial accounting information is used for many different purposes that it often is called âgeneral-purposeâ accounting information.
Management accounting involves the development and interpretation of accounting information intended specifically to aid management in running the business. Managers use this information in setting the companyâs overall goals, evaluating the performance of departments and individuals deciding whether to introduce a new line of products, and in making virtually all types of managerial decisions.
A companyâs managers and employees constantly need such information in order to run and control daily business operations. For example, they need to know the amount of money in the companyâs bank accounts, the types and quantities of merchandise in the companyâs warehouse, and the amount owed to specific creditors. Much management accounting information is financial in nature but has been organized in a manner relating directly to the decision at hand. However, management accounting information often includes evaluations of non-financial factors, such as political and environmental considerations, product quality, customer sanctification, worker productivity.
The preparation of income tax returns is a specialized field within accounting. To a great extent, tax returns are based on financial accounting information. However, the information often is adjusted or reorganized to conform within minimize the income tax burden.