Financial Accounting and Management Accounting

The upcoming discussion will update you about the difference between financial accounting and management accounting.

(i) Objects:

The main object of financial accounting is to measure business income and communication of information to the various categories of persons, i.e., management, creditors, suppliers of goods, bankers, investors, etc. whereas the main objectives of management accounting is to help the internal management.

(ii) Subject Matter:

The financial accounting deals with all the activities of the business, assesses results of the business as a whole and reveals the overall performance and position of the enterprise whereas management accounting is limited in its coverage, concerned with the activities of the different units, departments or divisions and deals with vital and significant activities of the business.

(iii) Nature:

Financial Accounting is objective in nature, lays emphasis on the past activities and represents historical records just to show the results of the business whereas management accounting is subjective in nature, stresses the future and uses historical costs and data for estimating the future.

(iv) Compulsion:

Financial accounting is obligatory for joint stock companies in order to satisfy statutory provisions or for tax purposes but management accounting is optional (purely voluntary) though its usefulness makes it highly desirable because of increasing managerial efficiency.

(v) Use of Accounting Information:

Financial accounting is more confined to prepare the accounting information to meet the requirements of external parties whereas management accounting provides information for the internal use of management only.

(vi) Methodology:

Financial accounting records the transactions relating to income, expense, revenue, personal accounts and property accounts, etc. for the whole of the business whereas management accounting reports, costs and revenue by profit centre or responsibility centre.

Financial accounting reports financial transactions for the whole of the business whereas management accounting focuses on small parts of the organisation such as the cost and profitability of products, customers, activities, divisions, etc.

(vii) Precision:

In financial accounting more emphasis is laid down on the precision and reliability as to exactness of the facts and figures whereas in management accounting less emphasis is laid on precision, i.e., even approximate figures presented in time are more valuable than presenting late.

(viii) Publication and Audit:

Financial statements like income statement, position statement and cash flow statement are published for the general use of the public because there is a statutory requirement for public limited companies to publish annual financial accounts for the public regardless of whether or not management regards the information as useful.

These statements are required to be audited by the Chartered Accountants. But the statements prepared by the management accountant are not to be published and audited as these are for internal use.

(ix) Description:

In financial accounting all those transactions are recorded which can be measured in monetary terms but in management accounting certain non-monetary events like competition, technical changes, changes in the value of money, quantities of material consumed, number of workers etc. are also dealt.

(x) Periodicity of Reporting:

The period of reporting is much longer in financial accounting as compared to management accounting. In financial accounting final accounts are prepared on year to year basis whereas management accounting lays emphasis on weekly, fortnightly and monthly reporting.

(xi) Accounting System:

Financial accounting is based on double entry system whereas management accounting is not based on double entry system.

(xii) Accounting Standards:

Financial Accounts are to be prepared as per accounting standards issued by ICAI whereas management accounting is not bound by accounting standards. From the above discussion we can conclude that both, financial accounting and management accounting are necessary for a concern.

While financial accounting lays more emphasis on the past but is very essential for future forecasting of the events. Management accounting though deals with the future events but has to take into consideration the past events also. For becoming a successful management accountant, knowledge of financial accounting is very essential.

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