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Financial accounting is an early form of accounting that involves recording business transactions and summarizing data into reports that are presented to users so that sound financial decisions can be made .
On the other hand, management accounting is a new field of accounting that studies aspects of management. It involves providing financial data to company management so that they can make sound economic decisions. Financial accounting emphasizes presenting a true and fair view of a company’s financial position to various parties.
In contrast, management accounting aims to provide both qualitative and quantitative information to managers, to help them make decisions and thereby maximize profits. This article explains in detail the difference between financial accounting and management accounting.
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Definition of Management Accounting
Another name for management accounting is management accounting. Management accounting facilitates management in formulating policies, forecasting, planning and controlling variances. It collects and analyzes both quantitative and qualitative information. Any simple and straightforward format can be used to prepare management reports. It can include charts, tables, graphs, etc. for a better presentation.
Simply put, management accounting is a process that involves preparing management reports and accounts to provide accurate and timely information that managers need for decision-making purposes. Furthermore, depending on the needs of the management, these reports can be prepared – daily, weekly, monthly or annually. There is no defined format based on which this will be reported.
Management accounting involves the use of accounting information collected using various accounting methods for purposes such as:
- Policy formulation
- Planning
- Control and decision making management board’s decision.
The functional area of management accounting is not limited to providing financial or cost information but it also extracts relevant information from various activities performed in the business process to helps management set budgets, set goals and make decisions etc.
- This involves providing information to management so that they can effectively carry out their management responsibilities and functions.
- It provides company management with historical and estimated data used to evaluate and monitor performance and plan future activities.
Definition of Financial Accounting
1: Accounting provides information on
Financial accounting is the purest form of accounting. It takes care of proper record keeping, financial reporting, and communication of financial data to provide relevant information to users. It is based on:
- Accounting Assumptions
- Accounting Principles
- Accounting Conventions
Financial statements prepared under Schedule III of the Companies Act, 2013. Generally, financial accounting aims to verify information related to performance, profits and the position of the organization according to the commercial activities carried out. But recently, information regarding cash flow and earnings per share is also provided using financial statements.
- Its objective is to systematically record financial transactions in accounts, facilitating the preparation of financial statements.
- This involves the preparation of financial statements, i.e. balance sheet, income statement and cash flow statement. It summarizes the operating results of the relevant accounting year and the financial position as at that date.
- Users of financial statements may include shareholders (current and potential), unions, creditors, financial analysts, government agencies, etc.
The main objective of financial accounting is to verify the business performance of an enterprise in terms of results during the period. Additionally, it tends to provide information regarding the company’s financial position as of the last day of the accounting period.
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As we have discussed the basic meaning of both types of accounting, let us understand the difference between financial accounting and management accounting:
- Financial accounting is the subject that deals with Prepare financial reports and report information to users. On the other hand, management accounting involves providing useful information to management, helping them develop policies and day-to-day operations for the business to operate effectively.
- Financial accounting uses monetary data of past financial activities so it is historical. On the other hand, management accounting is future oriented as it provides both present and future information in the form of forecasts and budgets that are properly analyzed and presented in detail as a basis for decision making.
- Financial accounting only reports events that can be described in monetary terms, and non-monetary events that have a positive or negative impact on the success or failure of a business are completely ignored. In contrast, management accounting records and reports financial and non-financial events for better decision making. Metrics such as number of employees, Labor hours, machine hours, and product units are also important for analysis and decision making.
- In financial accounting, the reports produced are mainly used by external users but internal users also use them. It reflects how the company uses its resources over a certain period of time. External users use it for decision-making purposes. However, it is the management board members who use the reports produced within the management accounting framework.
- For the purpose of recording, classifying, summarizing and reporting commercial transactions in financial accounting. Generally accepted accounting principles (GAAP) are used. On the contrary, in the case of management accounting, there is no obligation to use generally accepted accounting principles (GAAP).
- Financial accounting produces information and reports of a public nature. These are general-purpose financial reports that meet the information needs of many users. It tracks the financial performance of the entire company, not just an individual department or division. On the other hand, in management accounting, reports are prepared by the company management for private use and are therefore confidential. These are special-purpose reports that determine the performance of units, product lines, and divisions. The data generated includes events, estimates, analytical forecasts, budgets, and more.
- Financial accounting looks at the big picture because it looks at the entire business. In contrast, management accounting examines business operations by segment, often called responsibility centers.
- Record keeping and periodic financial reporting according to the financial accounting system are mandatory. On the other hand, management accounting is optional.
Comparison Between Management Accounting and Financial Accounting
| BASIS FOR COMPARISON | MANAGEMENT ACCOUNTING | FINANCIAL ACCOUNTING |
|---|---|---|
| Meaning | 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. | Financial Accounting is an accounting system that focuses on the preparation of a financial statement of an organization to provide financial information to the interested parties. |
| Orientation | Future | Historical |
| Users | Only internal users | Both internal and external users |
| Nature of statements prepared | Special purpose financial statements | General-purpose financial statements |
| Rules | No fixed rules for the preparation of reports | Rules of GAAP are followed |
| Reports | Both financial and non-financial aspects | Only financial aspects |
| Time Span | Management Reports are prepared whenever needed. | Financial statements are prepared for a fixed period, i.e. one year. |
| Objective | To assist internal management in planning and decision-making process by providing detailed information on various matters. | To create periodical reports |
| Publishing and auditing | It is not meant to be published or audited. It is for internal use only. | Required to be published and audited by statutory auditors |
| Format | not Specified | Specified |
Functions of Management Accounting
- Supplies Data: For management planning purposes, management accounting is the primary source of data. The accounts, documents and reports presented form a data warehouse that includes a variety of data related to the company’s past progress. This data is used a lot in making future predictions.
- Modifies data: Financial information necessary for management decision making is compiled and classified according to management requirements.
- Analyzes and Interprets Data: Meaningful and useful analysis of accounting data is performed for effective planning and decision making. And to do this, the presentation of data is carried out in a comparative form. Additionally, ratios are calculated and trends are projected.
- Means of communicating performance: Management accounting serves as a medium of communicating business performance in terms of plans, trends, forecasts, etc.
- Qualitative Information: Unlike financial accounting, management accounting is not limited to financial data to aid management in decision making but also includes all measurable information measured in monetary terms, to facilitate a better understanding of business performance.
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- Recording: In a large business, a number of transactions take place every day and it is impossible to remember all the transactions. Therefore, they must be recorded systematically and in chronological order. They then appear in newspapers, major books, etc. before being converted into final account.
- Validating: Because accounting principles are accepted and implemented globally. Every entry made in the books of accounts maintained by the company adds validity and authenticity to these transactions.
- Communicating: As we know, accounting is a business language that communicates business-related facts and information to users.
- Interpreting: With this feature, the financial situation of a company can be revealed very clearly and accurately.
Similarities of Management Accounting and Financial Accounting
- Both are a part of the basic accounting system.
- The two systems keeps a track of economic events.
- The two aim at quantifying the outcome of economic activities and transactions.
- Preparation of reports uses the same database.
- Evaluate the performance and position of the enterprise.
Practical Accounting by Entri: Course Features
- Industry Experts & Qualified CA Faculties
- Live Sessions by CA Professionals
- Master Excel & TallyPrime
- Computerised Accounting, Assignments & Assessments
- Specialisation Offered on UAE Accounting & Finance Module
- Soft Skill & Interview Training
- 100% Internship & Placement Assistance
- Course Completion & Internship Certification
- Effectual Workshops
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Course Curriculum in Detail
Fundamentals of Accounting
- Accounting Principles & Concepts
- Journal & Ledger
- Preparation of financial statements
- Bank reconciliation Statement
Business Structure
- Types of Company
- Sole Proprietorship
- Partnership Firm
Computerised Accounting
(Tally Prime)
- Company Creation
- Creation of Accounting Masters & Inventory Masters
- Voucher Creation
- GST
- TDS & TCS
- Payroll
- Reports – Profit and loss account, balance sheet
- Cost Centre & Cost Categories
- Ratio Analysis
- Other tools in tally
- Source Of income
- Tax slab
- Assessment Year and Previous year
- Key Provisions of Profit and gains from business /Profession
- Income Tax filing
- Advance Tax
- TDS & TCS Compliance
- Accounting for taxes
Direct Taxation Compliance
- Concept of GST
- CGST, SGST, IGST
- Tax Structure
- Exemptions
- Input Tax Credit
- Taxability
- Reverse Charge
- Filing Returns
Indirect Taxation
- Introduction of banking
- Types of banks
- Objectives of banking
- Bank funding
Banking
- Introduction
- Key provisions & compliance of LLP Act
- Key provisions & compliance of Companies Act
Corporate Law
- Introduction
- Key provisions & compliance of LLP Act
- Key provisions & compliance of Companies Act
Labour Law
- Introduction
- Key Provisions of ESI & PF Act
- Accounting & Compliances of ESI & PF
Communication
- Basic Etiquette
- Correspondence
- How to prepare a resume
- How to attend an interview
Add on Modules
UAE Accounting
- Applicable accounting standards
- Quick book / Peach Tree
Finance Module
- Analysis of Financial Statement
- Working Capital Management
- Accounts Payables & Receivables management
- Inventory Management
- Budgeting & Controls
- Costing Basics
- MIS reporting
Excel
- Introduction
- Quick Access , Cell , Row , Column
- Entering Data
- Formulas and Functions
- Formatting
- Adjusting worksheet Layout & Data
- Printing & Charts
- Worksheet and Workbooks
- Functions
- Data Management And Pivot Table
- Security Sharing And Macros
Benefits of Learning From Entri: Why to Choose
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Conclusion
Financial accounting is useful for keeping proper records of many business transactions.
Additionally, it becomes easier to compare the performance of two periods of an entity or between two entities. On the contrary, management accounting is useful in analyzing performance in order to develop the necessary strategy or formulate those policies so that the organization can be successful.
