Management Accounting Differences with Financial Accounting

05/05/2020 1 By indiafreenotes

Management Accounting also known as Managerial Accounting is the accounting for managers which helps the management of the organization to formulate policies and forecasting, planning and controlling the day to day business operations of the organization. Both the quantitative and qualitative information are captured and analyzed 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.

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.

A common question is to explain the differences between financial accounting and managerial accounting, since each one involves a distinctly different career path. In general, financial accounting refers to the aggregation of accounting information into financial statements, while managerial accounting refers to the internal processes used to account for business transactions. There are a number of differences between financial and managerial accounting, which fall into the following categories:

  1. Aggregation

Financial accounting reports on the results of an entire business. Managerial accounting almost always reports at a more detailed level, such as profits by product, product line, customer, and geographic region.

  1. Efficiency

Financial accounting reports on the profitability (and therefore the efficiency) of a business, whereas managerial accounting reports on specifically what is causing problems and how to fix them.

  1. Proven information

Financial accounting requires that records be kept with considerable precision, which is needed to prove that the financial statements are correct. Managerial accounting frequently deals with estimates, rather than proven and verifiable facts.

  1. Reporting focus

Financial accounting is oriented toward the creation of financial statements, which are distributed both within and outside of a company. Managerial accounting is more concerned with operational reports, which are only distributed within a company.

  1. Standards

Financial accounting must comply with various accounting standards, whereas managerial accounting does not have to comply with any standards when information is compiled for internal consumption.

  1. Systems

Financial accounting pays no attention to the overall system that a company has for generating a profit, only its outcome. Conversely, managerial accounting is interested in the location of bottleneck operations, and the various ways to enhance profits by resolving bottleneck issues.

  1. Time period

Financial accounting is concerned with the financial results that a business has already achieved, so it has a historical orientation. Managerial accounting may address budgets and forecasts, and so can have a future orientation.

  1. Timing

Financial accounting requires that financial statements be issued following the end of an accounting period. Managerial accounting may issue reports much more frequently, since the information it provides is of most relevance if managers can see it right away.

  1. Valuation

Financial accounting addresses the proper valuation of assets and liabilities, and so is involved with impairments, revaluations, and so forth. Managerial accounting is not concerned with the value of these items, only their productivity.

There is also a difference in the accounting certifications typically found in each of these areas. People with the Certified Public Accountant designation have been trained in financial accounting, while those with the Certified Management Accountant designation have been trained in managerial accounting.