Accounting, refers to the process of recording, classifying and summarizing in monetary terms, the business transactions and events and interpreting the results. It is used by entities to keep a track of their financial transactions. Financial Accounting and Management accounting are the two branches of accounting. Financial accounting stresses on giving true and a fair view of the financial position of the company to various parties.
On the contrary, management accounting aims at providing both qualitative and quantitative information to the managers, so as to assist them in decision making and thus maximizing the profit. This article excerpt is created to help you learn the significant differences between financial accounting and management accounting.
Content: Financial Accounting Vs Management Accounting
|Basis for Comparison||Financial Accounting||Management Accounting|
|Meaning||Financial Accounting is an accounting system that focuses on the preparation of financial statement of an organization to provide the financial information to the interested parties.||The accounting system which provides relevant information to the managers to make policies, plans and strategies for running the business effectively is known as Management Accounting.|
|Is is compulsory?||Yes||No|
|Information||Monetary information only.||Monetary and non-monetary information|
|Objective||To provide financial information to outsiders.||To assist the management in planning and decision making process by providing detailed information on various matters.|
|Time Frame||Financial Statements are prepared at the end of the accounting period which is usually one year.||The reports are prepared as per the need and requirements of the organization.|
|User||Internal and external parties||Only internal management.|
|Reports||Summarized Reports about the financial position of the organization||Complete and Detailed reports regarding various information.|
|Publishing and auditing||Required to be published and audited by statutory auditors||Neither published nor audited by statutory auditors.|
Definition of Financial Accounting
Financial Accounting is an accounting system which is concerned with the preparation of financial statement for the outside parties like creditors, shareholders, investors, suppliers, lenders, customers, etc. It is the purest form of accounting in which proper record keeping and reporting of financial data are done, to provide relevant and material information to its users.
Financial Accounting is based on various assumptions, principles and convention like going concern, materiality, matching, realisation, conservatism, consistency, accrual, historical cost, etc. The financial statement consists of a Balance Sheet, Income Statement and Cash flow statement which are prepared as per the guidelines provided by the relevant statute.
Normally, the statements based on the financial accounting are prepared for one accounting year, to enable the user to make comparisons regarding the financial position, profitability and performance of the company in a specific period. Not only external parties but internal management also gets information for forecasting, planning, and decision making.
Definition of Management Accounting
Management Accounting, also known as Managerial Accounting is the accounting for managers which helps the management of the organisation to formulate policies and forecasting, planning and controlling the day to day business operations of the organisation. Both the quantitative and qualitative information are captured and analysed by the management accounting.
The functional area of management accounting is not limited to providing a financial or cost information only. Instead, it extracts the relevant and material information from financial and cost accounting to assist the management in budgeting, setting goals, decision making, etc. The accounting can be done as per the requirement of the management, i.e. weekly, monthly, quarterly, etc. and there is no format set on the basis of which it is to be reported.
Key Differences Between Financial Accounting and Management Accounting
The following points explain the major differences between financial accounting and managerial accounting:
- Financial Accounting is the branch of accounting which keeps track of all the financial information of the entity. Management Accounting is that branch of accounting which records and reports both the financial and nonfinancial information of an entity.
- Users of financial accounting are both the internal management of the company and the external parties while the users of the management accounting are only the internal management.
- Financial accounting is to be publicly reported whereas the Management Accounting is for the use of the organisation and hence it is very confidential.
- Only monetary information is contained in financial accounting. As against this, management accounting contains both monetary and non-monetary information such as the number of workers, the quantity of raw material used and sold, etc.
- Financial Accounting is done in the prescribed format, whereas there is no prescribed format for the Management Accounting.
- Financial Accounting focuses on providing information about the functioning of the entity’s business to its users, whereas Management Accounting focuses on providing information to help them in evaluating the performance and devising plans for the future.
- The Financial Accounting is mainly done for a specific period, which is usually one year. On the other hand, the management accounting is done as per the needs of the management say quarterly, half yearly, etc.
- Financial accounting is a must for any company for auditing purposes. On the contrary, management accounting is voluntary, as no editing is done.
- Financial accounting information is required to be published and audited by statutory auditors. Unlike, management accounting, which does not require information to be published and audited, as they are for internal use only.
- Used by the Internal Management.
- Evaluation of Performance.
- Branch of Accounting.
- Presents the position of the entity.
Financial Accounting and Management Accounting are of great significance, in fact, they help the organisation in various ways. As financial accounting is helpful in the proper record keeping of innumerous transactions and comparison of the performance of two periods of an entity or between the two entities, while the management accounting is helpful in analysing the performance, making a strategy, taking an effective judgement and preparation of policies for the future.