The Generally Accepted Accounting Principles (GAAP) have been established to provide a nationwide standard of accounting. Using GAAP reporting supplies financial statements with a consistent structure, making them easily understood and comparable for external entities. The IRS and outside investors rely on GAAP to draw financial conclusions.
Although GAAP reporting is useful and necessary, the statements provided are often an assemblage of particular information delivered in an untimely manner to benefit internal decision makers. GAAP mainly functions for the benefit of external entities rather than being the most beneficial form of accounting for internal business operations. “Many changes in a company’s financial position or outlook are simply not fully recorded under GAAP” (Accounting and Finance for Small Business Made Easy, p. 88).
On the other hand, management accounting, also known as cost accounting, provides detailed information in a way that can be readily applied to internal operations. GAAP accounting can be misleading. Management may make decisions that drive the company based on GAAP numbers that might not reflect the true state of the business.
Management accounting “is a separate discipline that addresses management’s need for current, detailed, internal operating information, which might include unit costs of production, sales by store, or profitability of individual projects” (Accounting and Finance for Small Business Made Easy, p. 19). It is especially beneficial in manufacturing businesses.
In addition to serving the IRS for tax purposes, accounting must allow a business to draw practical applications for the company’s welfare based on its statements. There is a limitation in GAAP reporting for the purpose of internal operations. Management must adjust for these limitations with creative forms of accounting to meet the internal needs of their company.