This article highlights the key differences between Financial Accounting and Management Accounting.
Management accounting is primarily meant for management and concerned with providing the information needed within a business organization. It’s that part of accounting which is used specifically to facilitate the decision making process.Having extracted the financial information from various financial statements, it aims explicitly at providing detailed information that is of great use to management as well as various segments of a business entity. While it lays emphasis on all the phases of the activities of a business, it develops various management tools, such as, standard costs, fixed and flexible budgets, profit and loss forecasts that in turn serve various purposes internally. It undertakes preparing information and presents to management in a way that the process of policy making and day-to-day operations of a business may be carried out effectively and efficiently. That which adds more to its significance is its ability to provide services in all the functions of management, such as, planning, organizing, coordinating, motivating, communicating and controlling.
“Management accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information that assists executives in fulfilling organizational objectives.”
Some Key differences between Financial and Management accounting are mentioned below:-
The distinction between financial and management accounting may be made on the basis that the former is useful for external users, whereas the latter is mainly meant for management and internal users being interrelated with the former.
Management accounting is required by management so that the related activities may be planned and the performance be evaluated on timely basis. It provides the information which is internally useful and highlights the need and importance of establishing internal controls.
Management accounting is concerned with both present as well as future. It deals with everyday business operations effectively and efficiently, while in accordance with the requirement, it provides future-looking information to management helping in the functions of planning and controlling. In contrast to financial accounting which is useful for external users and available publicly, management accounting is particularly purposive for management while it maintains its confidentiality.In order to develop plans and setting up controlling measures, there is a need for detailed information, while financial accounting provides the elementary information, which may not be sufficient to serve the purpose. Management accounting undertakes such tasks as budgetary controls that are used for both purposes- planning and controlling.
It may be noted that management accounting is not confined to provide information pertaining to profit and loss in terms of monthly profit and loss statements and the current status of economic benefits and obligations (assets & liabilities). Though it’s interconnected with financial accounting, it exceeds more in providing various effective tools to management that are of great assistance in decision making and policy making process, while it lays emphasis on internal controls highlighting on necessary measures to be taken for corrections so that all the phases of the activities of a business entity may be performed efficiently.
The nature of financial accounting is historic, but management accounting is futuristic. In the sense, the financial accounting information extracted from financial statements, profit and loss statement and balance sheet is the monetary record of past events. On the other hand, management accounting represents predetermined as well as such information which is used as a basis for management action for futuristic motives.
As regards the periodicity of reporting, financial accounting is confined to periodic reporting, such as, six-monthly or yearly, but management accounting provides the reports as frequently as it’s needed by management. Since management needs frequent reporting system for various purposes, management accounting fulfills the purpose by way of providing the required reports.
The objective of financial accounting is to provide the information about the profit and loss and a financial position of a business to the desired users, whereas the objective of management accounting is to provide relevant information to management in facilitating decision making and policy making process, laying the emphasis on the effective utilization of organizational resources.
K. A. Fareed (Fareed Siddiqui)
Writer, Trainer, Author, Software Developer
BBA, MBA-Finance, MPhil-Financial Management, (PhD-Management)
Level 1 - Leadership and Management ILM – UK
Individual Member of Institute of Management Consultants of India
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