Essentials of Health Care Finance - Essay Example

Financial accounting primarily relates to the preparation of financial statements and their presentation (Rajasekaran & Lalitha, 2011). The uses of financial accounting are best described in relation to these statements which are part of the process of financial reporting (Rajasekaran & Lalitha, 2011 p.4).

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Shareholders of a company, suppliers, management, creditors, lenders and government agencies are all users of financial statements. These users make rational decisions based on the useful information provided for example by use of ratios which are compared and analyzed. Financial accounting gives a picture of an entity's ability to generate cash flows from the various activities through a cash flow statement thus provides information about the past and prospects. Further through computation of the different ratios using financial statements, information about an entity's liquidity position, gearing level, efficiency, earning power, solvency and efficient time utilization is determined. Financial statements which are prepared through financial accounting provide objective information about an enterprise, and this facilitates making judgments and decisions that are informed. Also, at a particular time, financial accounting through the statements indicates a firm's assets, liabilities, changes in financial position, earning power from operations and financial activities.

Managerial accounting, on the contrary, relates to the branch of accounting which helps in decision making to the internal users of a company such as management. Information from this form of accounting assists management to formulate policies and control the operations. Unlike financial accounting which requires strict compliance with accounting standards and is mandatory, managerial accounts are optional and do not require any compliance. Management accounting information enables managers of a company's to undertake planning which involves the setting of goals and means of achieving them. Also, it facilitates controlling an activity that involves monitoring the implementation of the plan through a comparison of actual and expected performance. A corrective action is taken where there are variances between the two. Management accounting also enables managers to make decisions easily especially where there are competing alternatives, and these would be decisions on for example whether to buy a product or make.

Management accounts are prepared and used internally whereas financial statements are used both internal and external to the company. However, the preparation of financial statements is mandatory and requires adherence to the rules stipulated by the Generally Accepted Accounting Principles. Both sets of statements provide unique benefits to users thus serve important roles in a company. To plan ahead and come up with ways of growing based on an approximation of what will happen; Management accounting helps managers on this while financial accounting informs the various users of financial statements about a firm's past and present performance. Therefore both sets of accounts are significant to a company.

Duality principle means that a transaction is composed of two parts implying that for every debit entry there must be an equivalent credit entry. The total of all the debit entries must be the same with credit entries. The double entry system uses the terms debit and credit which if interpreted as an increase or decrease or plus and minus will get someone very confused. The interpretation makes understanding of duality as the most difficult principle to understand. One should know that debit and credit are concepts that capture the flow of economic value from one source to a destination and ensure that the accounting equation balances all time. It is, therefore, important to avoid the normal language interpretation of the two accounting terms.

References

Rajasekaran, V, & Lalitha, R. (2011). Financial Accounting. New Delhi: Dorling Kindersley.