In this post you will study Difference between Management Accounting and Financial 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 summarizing 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.
