Cambodian Mekong University Accounting 1A (AC 101)

Differences between Financial Management

and Financial Accounting

I. Introduction

Different countries have contributed to the development of accounting over the

centuries. When archaeologists uncover remains in the Middle East, almost anything
with writing or numbers on it is a form of accounting: expenses of wars or feasts or
constructions; lists of taxes due or paid. It is now fairly well documented that the
origins of written numbers and written words are closely associated with the need to
keep account and render account. Financial accounting is a specialized branch of
accounting that keeps track of a company's financial transactions. Using standardized
guidelines, the transactions are recorded, summarized, and presented in a financial
report or financial statement such as an income statement or a balance sheet. The
purpose of accounting is to provide the information that is needed for sound economic
decision making. The main purpose of financial accounting is to prepare financial
reports that provide information about a firm's performance to external parties such as
investors, creditors, and tax authorities. Managerial accounting contrasts with financial
accounting in that managerial accounting is for internal decision making and does not
have to follow any rules issued by standard-setting bodies. Financial accounting, on the
other hand, is performed according to Generally Accepted Accounting Principles
(GAAP) guidelines. Talk about the financial management there are five key tasks
undertaken in financial management financial planning investment project appraisal
financial decisions capital market operations financial control. Financial planning
provides the means, through plans and projections, to evaluate the proposed courses of
action. Similarly financial control deals with the ways and means by which the plans
are achieved. The next two tasks, investment project appraisal and financing decisions
are seen by some, including Brealey and Myers, as the two most important tasks.
Investment project appraisal is the assessment and evaluation of the relative strengths
of a company’s investment propositions. The financing decisions involve the
identification and choice of the sources of funds which will provide the cash to be

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Cambodian Mekong University Accounting 1A (AC 101)

invested into the selected projects. Part of the finance function is dealing with the
capital market since a large part of the finance is obtained through the capital market,
not least those funds provided by the equity owners, the ordinary shareholders. This
function does not just deal with the raising of funds but also with the ongoing
relationship between the company and the market place.

II. Differences

1. Financial management

Financial Management can be defined as the management of the finances of a

business / organization in order to achieve financial objectives taking a commercial
business as the most common organizational structure, the key objectives of financial
management would be to:

• Create wealth for the business

• Generate cash, and

• Provide an adequate return on investment bearing in mind the risks that the
business is taking and the resources invested.

There are three key elements to the process of financial management:

- Financial Planning

Management need to ensure that enough funding is available at the right time to
meet the needs of the business. In the short term, funding may be needed to invest in
equipment and stocks, pay employees and fund sales made on credit. In the medium
and long term, funding may be required for significant additions to the productive
capacity of the business or to make acquisitions.

- Financial Control

Financial control is a critically important activity to help the business ensure

that the business is meeting its objectives. Financial control addresses questions such as:

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Cambodian Mekong University Accounting 1A (AC 101)

• Are assets being used efficiently?

• Are the businesses assets secure?

• Do management act in the best interest of shareholders and in accordance with

business rules?

- Financial Decision-making

The key aspects of financial decision-making relate to investment, financing and

dividends:

• Investments must be financed in some way – however there are always

financing alternatives that can be considered. For example it is possible to raise finance
from selling new shares, borrowing from banks or taking credit from suppliers

• A key financing decision is whether profits earned by the business should be

retained rather than distributed to shareholders via dividends. If dividends are too high,
the business may be starved of funding to reinvest in growing revenues and profits further.
Financial Management is the process of managing the financial resources, including
accounting and financial reporting, budgeting, collecting accounts receivable, risk
management, and insurance for a business.

The financial management system for a small business includes both how you
are financing it as well as how you manage the money in the business. In setting up a
financial management system your first decision is whether you will manage your
financial records yourself or whether you will have someone else do it for you. There
are a number of alternative ways you can handle this. You can manage everything
yourself; hire an employee who manages it for you; keep your records inhouse, but
have an accountant prepare specialized reporting such as tax returns; or have an
external bookkeeping service that manages financial transactions and an accountant
that handles formal reporting functions. Some accounting firms also handle
bookkeeping functions. Software packages are also available for handling bookkeeping
and accounting. Bookkeeping refers to the daily operation of an accounting system,

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Cambodian Mekong University Accounting 1A (AC 101)

recording routine transactions within the appropriate accounts. An accounting system

defines the process of identifying, measuring, recording and communicating financial
information about the business. So, in a sense, the bookkeeping function is a subset of
the accounting system. A bookkeeper compiles the information that goes into the
system. An accountant takes the data and analyzes it in ways that give you useful
information about your business. They can advise you on the systems needed for your
particular business and prepare accurate reports certified by their credentials. While
software packages are readily available to meet almost any accounting need, having an
accountant at least review your records can lend credibility to your business, especially
when dealing with lending institutions and government agencies. Setting up an
accounting system, collecting bills, paying employees, suppliers, and taxes correctly
and on time are all part of running a small business. And, unless accounting is your
small business, it is often the bane of the small business owner. Setting up a system that
does what you need with the minimum of maintenance can make running a small
business not only more pleasant, but it can save you from problems down the road. The
basis for every accounting system is a good Bookkeeping system. What is the
difference between that and an accounting system? Think of accounting as the big
picture of how your business runs -- income, expenses, assets, liabilities -- an organized
system for keeping track of how the money flows through your business, keeping track
that it goes where it is supposed to go. A good bookkeeping system keeps track of the
nuts and bolts -- the actual transactions that take place. The bookkeeping system
provides the numbers for the accounting system. Both accounting and bookkeeping can
be contracted out to external firms if you are not comfortable with managing them
yourself. Even if you outsource the accounting functions, however, you will need some
type of Recordkeeping Systems to manage the day-to-day operations of your business -
in addition to a financial plan and a budget to make certain you have thought through
where you are headed in your business finances. And, your accounting system should
be producing Financial Statements. Learning to read them is an important skill to
acquire. Another area that your financial management system needs to address is risk.
Any good system should minimize the risks in your business. Consider implementing
some of these risk management strategies in your business. Certainly, insurance needs
to be considered not only for your property, office, equipment, and employees, but also

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Cambodian Mekong University Accounting 1A (AC 101)

for loss of critical employees. Even in businesses that have a well set up system, cash
flow can be a problem. There are some tried and true methods for Managing Cash
Shortages that can help prevent cash flow problems and deal with them if they come
up. In the worst case you may have difficulties meeting all you debt obligations. Take a
look at Financial Difficulties to learn more about ways to manage situations in which
you have more debt than income.

2. Financial Accounting

The purpose of accounting is to provide the information that is needed for sound
economic decision making. The main purpose of financial accounting is to prepare
financial reports that provide information about a firm's performance to external parties
such as investors, creditors, and tax authorities. Managerial accounting contrasts with
financial accounting in that managerial accounting is for internal decision making and
does not have to follow any rules issued by standard-setting bodies. Financial
accounting, on the other hand, is performed according to Generally Accepted

Accounting Principles (GAAP) guidelines.

- Accounting Standards

In order that financial statements report financial performance fairly and consistently,
they are prepared according to widely accepted accounting standards. These standards
are referred to as Generally Accepted Accounting Principles, or simply GAAP.
Generally Accepted Accounting Principles are those that have "substantial authoritative
support".

- Accrual vs. Cash Method

Many small businesses utilize an accounting system that recognizes revenue

and expenses on a cash basis, meaning that neither revenue nor expenses are
recognized until the cash associated with them actually is received. Most larger
businesses, however, use the accrual method. Under the accrual method, revenues and
expenses are recorded according to when they are earned and incurred, not necessarily

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Cambodian Mekong University Accounting 1A (AC 101)

when the cash is received or paid. For example, under the accrual method revenue is
recognized when customers are invoiced, regardless of when payment is received.
Similarly, an expense is recognized when the bill is received, not when payment is
made. Under accrual accounting, even though employees may be paid in the next
accounting period for work performed near the end of the present accounting period,
the expense still is recorded in the current period since the current period is when the
expense was incurred.

- Underlying Assumptions, Principles, and Conventions

Financial accounting relies on the following underlying concepts:

• Assumptions: Separate entity assumption, going-concern assumption, stable

monetary unit assumption, fixed time period assumption.
• Principles: Historical cost principle, matching principle, revenue recognition
principle, full disclosure principle.
• Modifying conventions: Materiality, cost-benefit, conservatism convention,
industry practices convention.

- Financial Statements

Businesses have two primary objectives:

• Earn a profit
• Remain solvent

Solvency represents the ability of the business to pay its bills and service its
debt. The four financial statements are reports that allow interested parties to evaluate
the profitability and solvency of a business. These reports include the following
financial statements:

• Balance Sheet
• Income Statement
• Statement of Owner's Equity
• Statement of Cash Flows

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 Cambodian Mekong University Accounting 1A (AC 101)

These four financial statements are the final product of the accountant's analysis of the
transactions of a business. A large amount of effort goes into the preparation of the
financial statements. The process begins with bookkeeping, which is just one step in the
accounting process. Bookkeeping is the actual recording of the company's transactions,
without any analysis of the information. Accountants evaluate and analyze the
information, making sense out of the numbers.

For the reports to be useful, they must be:

• Understandable
• Timely
• Relevant
• Fair and Objective (free from bias)

- Double Entry Accounting

Financial accounting is based on double-entry bookkeeping procedures in which

each transaction is recorded in opposite columns of the accounts affected by the
exchange. Double entry accounting is a significant improvement over simple and more
error-prone single-entry bookkeeping systems.

- Fundamental Accounting Model

The balance sheet is based on the following fundamental accounting equation :

Assets = Liabilities + Equity

This model has been used since the 18th century. It essentially states that a
business owes all of its assets to either creditors or owners, where the assets of a
business are its resources, and the creditors and owners are the sources of those
resources.

- Transactions

To record transactions, one must:

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1. Identify an event that affects the entity financially.

2. Measure the event in monetary terms.
3. Determine which accounts the transaction affects.
4. Determine whether the transaction increases or decreases the balances in those
accounts.
5. Record the transaction in the ledgers.

Most larger business accounting systems utilize the double entry method. Under
double entry, instead of recording a transaction in only a single account, the transaction
is recorded in two accounts.

- The Accounting Process

Once a business transaction occurs, a sequence of activities begins to identify and

analyze the transaction, make the journal entries, etc. Because this process repeats over
transactions and accounting periods, it is referred to as the accounting cycle.

III. Conclusion

According to we describe above we suppose that Financial management is

concerned with the managerial decisions that result in the acquisition and financing of
short term and long term credits for the firm. Here it deals with the situations that
require selection of specific assets (or combination of assets), the selection of specific
problem of size and growth of an enterprise. Here the analysis deals with the expected
inflows and outflows of funds and their effect on managerial objectives. So, it means
two main aspects of financial management like procurement of funds and an effective
use of funds to achieve business objectives. The main purpose of financial accounting
is to prepare financial reports that provide information about a firm's performance to
external parties such as investors, creditors, and tax authorities. . Financial accounting
is performed according to Generally Accepted Accounting Principles (GAAP)
guidelines.

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