In this post you will study Difference between Financial Accounting Management Accounting and Cost accounting. Study and make the proper notes grabbing full understanding of this topic.
MANAGEMENT ACCOUNTING
Management Accounting is the Identification, Measurement, Accumulation, Analyses, Preparation, Interpretation and Communication of information that assists managers in fulfilling organizational objectives. Management accounting is all about supplying right information to right people at the right time.
American Accounting Association has defined management accounting as:
“Management accounting is the application of appropriate techniques and concepts in processing historical and projected economic data of any entity to assist management in establishing plans for reasonable economic objectives in the making of rational decisions with a view towards these objectives”.
FINANCIAL ACCOUNTING
‘American Institute of Certified Public Accountants’ has defined Financial Accounting as “The art of recording, classifying and summarising in a significant manner and in terms of money, transactions and events which are in part at least of a financial character and interpreting the results there of Accounting is often regarded as the language of business. It is that part of accounting which is employed to communicate the financial information of a business unit. The main objective of accounting is to find out profitability and to provide information about financial position of the concern. The profitability can be measured by preparing profit and loss accounts in which all the revenue items are recorded. The financial position of a concern can be judged by preparing balance sheet which keeps record of all the assets and the liabilities.
| Basis of Difference | Management Accounting | Financial Accounting |
| Objective | The main objective of management accounting is to provide the information to the management for formulating the policies and plans. thus, it involves internal reporting. Management accounting is primarily an internal reporting system. | The primary objective of the financial accounting is to record various transactions and to judge the financial position and profitability of the concern on due date. it involves reporting to owners, creditors and government. Financial accounting is primarily and external reporting system. |
| Nature | Management accounting is mainly concerned with future plans and policies. Management accounting uses historical data for taking decisions for future. In management accounting projected figures are used. | Financial accounting is concerned with past records. It records the transaction already taken place. In financial accounting actual figures are used. |
| Subject Matter | Management accounting deals separately with different units, departments and concerns. It covers only vital and significant aspects. | Financial accounting is concerned with assessing the results of whole business i.e. position of a business as a whole. It covers all the aspects. |
| Flexibility | Management accounting considers the standards fixed by management itself. So it is free in its approach and more flexible as compared to the financial accounting. | In financial accounting the accounts are prepared in accordance with standards fixed by auditor. |
| Legal Compulsion | A business is free to install or not to install a system of management accounting. Thus, management accounting is adopted on voluntary basis to increase the management efficiency. | The preparation of financial accounts is compulsory in certain undertakings while these are necessary in others. |
| Precision | In management accounting approximate figures are considered more useful than the exact figures. hence no emphasis is given to the actual figures. | Under financial accounting it is necessary to record the transactions with perfect accuracy and precision. all the transactions are therefore recorded at actual amount involved. |
| Description | In management accounting both monetary and non-monetary events are recorded. the factors like competition in market, impact of political changes, a situation of trade cycles and such other factors are also considered in management accounting, though these cannot be measured in monetary terms. | In financial accounting only those transactions can be recorded which can be measured in monetary terms. |
| Coverage | Management accounting covers concerns only a part of activities data i.e. important for taking decisions whether financial or non-financial. | Financial accounting covers all the business activities which can be measured in financial terms. |
| Publication | Management accounting reports are prepared for internal use and these are not published. | As financial accounts are useful for outsiders, these accounts are published for the benefit of public. Under company law every registered company is supposed to supply a copy of profit and loss account and balance sheet to the registrar of company at the end of the year. |
| Period | There are no specific periods for which management accounts are prepared. | Financial accounts are prepared for a particular period. Profit and loss account is generally prepared for one year. |
| Accounting principles | No such set of principles are followed in management accounting. | Financial accounting is governed generally by the generally accepted principles and conventions. |
| Audit | It is not possible to get management accounts audited as projected data is also included in management accounts. | Under companies law, auditing of accounts is compulsory. |
| Reporting | But under management accounting, immediate and prompt communication of data is very much required. Management accounting reports are meant for internal use only. There is no binding for preparing management accounting reports. The period of reporting is much longer in financial accounting as compared to management accounting. | Under financial accounting, financial reports are prepared not only for benefit of the concern but also for outsiders. But in financial accounting prompt and quick communication of information and keeping them up to date is not required. |
| Presentation of information | Management accounting reveals predetermined and past information. | Financial accounting presents historical information. |
| Center of focus | In management accounting the main focus is on certain units of special importance and not on business as a whole. | In financial accounting the main focus is business as a whole. |
| Non- monetary information | In management accounting both monetary and non-monetary events like technical changes, competition are recorded. | In financial accounting only monetary transactions are recorded. |
| Methodology | In management accounting the information is collected and analyzed according to responsibility centre or cost centre. | In financial accounting all the transactions relating to nominal accounts, real accounts and personal accounts are recorded. |
CONCLUSION
Hence from the above discussion we can conclude that despite the close relationship between financial and management accounting, both the financial and management accounting differ on various points like legal compulsion, reporting principles, monetary transactions, object and publication etc. But in order to discharge the functions, the management accounting has to depend upon financial accounting, hence inseparable part of financial accounting.
COST ACCOUNTING
Cost Accounting is an art or process of recording, analysing and classifying of expenditure for the purpose of product costing or service costing, ascertainment of profitability, operational planning and cost control. It is a forward-looking approach which is related to the recording, analysing and classifying of expenditure with the objective of ascertaining the total and per unit cost of product or service.
ICMA (Institute of Cost and Management Accountants) defined Cost Accounting as “Cost accounting is the process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centres and cost units. In its widest usage, it embraces the preparation of statistical data, the application of cost control methods and ascertainment of the profitability of activities carried out or planned.”
RN Carter defined Cost Accounting as “It is a system of recording in accounts the materials used and labour employed in the manufacture of certain commodity or on a particular job.”
| Basis of Difference | Management Accounting | Cost Accounting |
| Scope | The scope of management accounting is wider than that of cost accounting and uses data from both cost and financial accounts and supplies the information to management for managerial uses. | Cost accounting is having narrow scope. It is limited only to those transactions which are related to cost of production. So, scope is only limited to cost. |
| Objective | The main objective of management accounting is to use accounting information to take various managerial decisions and to maximize the value of the firm. | The main objective of cost accounting is to sustain the cost of production and to control the cost. |
| Tools Used | Management accounting uses all the tools used by the cost but as its role is wider than cost accounting it uses another tools like ratio analysis, fund flow analysis, operations research, statistical methods to analyse and interpretate the data for use of management. | Cost accounting in order to control the cost uses various techniques like standard costing, marginal costing, budgetary control and unit costing etc. |
| Method | As management accounting is for the use of the management. The users interpret the results and apply that methods and procedures for preparation of accounts which suits their needs. | Cost accounts are prepared according to some set of rules and standards. |
| Double entry system | It is not applied. | It is applied in cost accounting. |
| Accounting Period | Management accounting is for the use of the management. The users interpretate the results and apply that methods and procedures for preparation of accounts which suits their needs. | In cost accounting accounts are prepared normally for current year activities and no futuristic approach is there. |
| Evolution | Management accounting has taken birth from the limitation of the cost accounting. As costing only highlights on the cost and management accounting is a continuous watchful process to collect the data available from cost and financial records and assess the need for their revision and improvement. | Cost accounting has taken birth due to limitation that financial accounting fails to predict the information relating to cost aspects of particular product or a product line. |
| Variance Analysis | The management accountant will not only make variance analysis but also suggest the ways and means for improving the operations. | The cost accountant will compare actual performance with standard performance and report to management for necessary actions. |
| Status in hierarchy level | Management accountant is placed at higher hierarchy level. | Cost accountant is placed at lower level in hierarchy. |
| Dependence | Management accounting system is dependent upon the information supplied by cost accounting so it cannot be installed without it. | Cost accounting system may be installed without management accounting. |
CONCLUSION
To sum up, management accounting is concerned with a system as a whole. The function of management accountant is inevitable extension of that of cost accountant. The role of cost accountant is not complete as long as he extends his activities to areas of management accountant.
