Accounting is usually seen as having two distinct strands, Management and Financial accounting. Management accounting, which seeks to meet the needs of managers and Financial accounting, which seeks to meet the accounting needs of all of the other users. The differences between the two types of accounting reflect the different user groups that they address. Briefly, the major differences are as follows:

Nature of the reports produced. Financial accounting reports tend to be general purpose. That is, they contain financial information that will be useful for a broad range of users and decisions rather than being specifically designed for the needs of a particular group or set of decisions. Management accounting reports, on the other hand, are often for a specific purpose. They are designed either with a particular decision in mind or for a particular manager.

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The reporting burden on enterprises and their associated business and legal entities is significant.

An enterprise consists of one or more business entities for which management has to keep accounts and report financial condition and performance to regulators such as the Internal Revenue Service (IRS) and the equivalent state revenue agencies. Those enterprises that have employees must report payroll information to the IRS, the Social Security Administration, and state revenue and unemployment agencies. Those enterprises that sell securities must report financial condition and performance to the Securities and Exchange Commission (SEC). Reports may also have to be filed with the United States Immigration and Citizenship Services, the United States Department of Labor, the United States Bureau of Customs and Border Protection, and various other Federal and state agencies. Counties and municipalities may require reports too. Those enterprises doing business outside the United States may have to file reports to foreign governments. Taxes, duties, and fees are paid either with the report filings, or separately, depending on regulatory requirements. If paid separately, the payments have to be reconciled to the report filings. Legal entities may have to report financial condition and performance to regulators such as state corporation agencies.

Management must measure both financial and non-financial performance within and across the various entities that make up an enterprise on whatever schedule is necessary to conduct business. The reports that are prepared for internal use should be available on a “need to know” basis. Indicators for financial performance measurement include revenues, costs and expenses, profits, cash flows, and returns on investment. Financial measurements are based upon rates, quantities of input, volumes of output, and aging. Financial performance must be evaluated in terms of non-financial measures, such as market share and penetration, product usage, employee and customer satisfaction, quality, time-to-market, cycle time, and asset utilization. As information systems become more real-time oriented, some reports may be available on demand.

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One of the fundamental accounting principles is matching revenue with cost in any period. This is relatively simpler while dealing with items in cost of goods sold, such as purchase of raw materials, supplies, and cost incurred in conversion to finished goods for sale etc. But this becomes more complex while dealing with assets that have longer lives. There are two different types of fixed assets that a company invests in, tangibles and intangibles. Tangible fixed assets are assets such as Buildings, Plant and equipment that have nearly definite lives. In most cases the value of the fixed assets also depreciates over time. At the end of its useful life assets may have a salvage value. This is true for plant and machinery but not for buildings. Although the value of the buildings might increase from year to year, GAAP requires that depreciation be calculated and accounted as an expense.

A business invests in fixed assets to make and sell products and/or services in its business. So, the cost of the long term operating resource needs to be allocated over the years these fixed assets are used. One cannot charge the entire cost of fixed asset in the year of purchase. The cost needs to be segregated over its useful life and applied to the period as a period expense. Sales revenue, recovers, in part a charge for the use of the assets every time a product or service is sold. This is the underlying logic for Depreciation as an expense.

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Depreciation is the systematic deduction of the worth of assets that are used in production. The assets are the capital investments a company makes to enable production of goods or services. They include equipments and machinery, vehicles, and buildings among others. They are not recorded as expenses. Because these are resources, they are assigned a useful life span. Based on an estimate of the life of an asset minus the salvage value, entities are allowed to distribute the worth of the asset over the period of use of the asset measured in years in most cases. What this means is that at the end of each year, the worth of the asset is deducted because it is no longer expected to as productive as it was at the beginning of the year. There are different methods of depreciation.

Straight-line Depreciation:
The straight-line depreciation method allows entities to calculate the worth of an asset and distribute an even deduction of the amount on a yearly basis over the life of the asset. In this case the cost of the asset minus the estimated salvage value divided by the estimated useful life of the asset. The salvage value is what the asset is expected to fetch when sold at the end of its useful life.

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