Financial Accounting V/S Management Accounting


Accounting by nature is a task beyond menial recording of numbers and figures. Our previous articles have explained in depth, the relevance of accounting for businesses and individuals in the day-to-day management of financial resources. In this blog, our goal is to dive deeper into the branches of accounting —financial and management accounting, their definition and fundamental differences to broaden our readers’ understanding and career options.

Both financial and management accounting offer businesses the insights needed for decision-making and maximizing profitability. However, they have vast differences in the way the activities are carried and the parties that are involved in those operations.

To impart a fair idea on the concepts, similarities and differences between financial and management accounting, read the below their definitions.

Financial Accounting

Financial accounting is an immensely popular field in accounting careers in India ever since the enforcement of LPG (liberalization, privatization and globalization) policy in 1991. The following years saw a rise in employment opportunities created by MNCs and IT giants, looking for a strong financial backend support. So what makes financial accounting special?

Financial accounting can be defined as that branch of accounting that specifically deals with the preparation of financial statements to arrive at financial results of the company to share with the creditors, shareholders, investors, suppliers, customers and lending, financial institutions.

The financial statements prepared by an accountant are balance sheets, income statements and cash flow statements. These reports reply on accurate financial data that are recorded by the accounting teams based on the standard accounting and bookkeeping practices. Therefore, financial accounting is called as the purest form of accounting that aids in decision making, making comparisons and forecasting by the management teams and also outside investors and lenders.

Management Accounting

Management accounting is that branch of accounting which goes hand in hand with the prudent management of daily financial activities in an organization. Unlike financial accounting, management accounting involves control and creation of policies and methods to efficiently manage the everyday financial and non-financial transactions to facilitate decision making and planning in the long-run.

The management accounting team engage in the rigorous task of furnishing the information related to the cost, expenditure, income and other non-financial essentials to set targets and goals for the weeks, months or quarters. The team analyses the financial information to carry out other important activities like budgeting, planning and decision making.

There are no specific rules followed by the management accounting team when it comes to recording of financial transaction and other, relevant non-financial information.

Differences between Financial and Management Accounting

Although most people argue that financial and management accounting are almost the same expect for a slight variation in the titles and tasks offered to an accountant by a firm, the differences between the two are strikingly large. We have classified those differences based on nature and scope of financial and management accounting;

  • Objective: Financial accounting focuses on revealing the financial information to the external parties such as investors, banks, lending institutions, creditors, shareholders, customers, etc. Whereas, management accounting uses its reports to guide the internal parties of the organization like managers and employees for the management and control of its costs and expenses.
  • Nature of Information Stored and Shared: Financial accounting deals with the accurate financial data, real values of asset and liabilities and transactions that are recorded in the chronological order to derive annual financial results and reports. Management accounting teams rely on the most approximate values of both financial and non-financial information. It takes into account the current and future values or reports.
  • Timeline: In financial accounting, the reports and statements like balance sheet, income statements, etc are created and shared at the end of the year. But in management accounting, the accountants record the immediate values or transactions or the projected future value.
  • Purpose of Creation of Reports: The statements and reports created in the financial accounting department is to publish the overall financial position of the company to the outsiders. While the reports created under the management accounting teams are to observe and influence organizational behaviour by increasing the spending or controlling expenses to impact productivity.
  • Accounting Standards and Practices: The financial accounting teams are supposed to adhere to accounting standards like GAAP, FASB and SEC. The management accounting does not have to comply with any standard rules but the organizational policies and management govern the ways the statements or records are created and shared within the organization.

Similarities between Financial and Management Accounting

There are a few important areas where both the branches of accounting boast of similarities regardless of the differentiations the organizations and industry has provided to these concepts:

Management Teams Reply on Financial Reports: The forecasts and statement of profit and loss, balance sheet as well as cost and expense statements created by both departments will be published to the management teams of the organization. The reports created by the individual teams serve the purpose of assisting the overall management of the organization in making necessary financial decision and curb unneeded expenses.
Performance Measurement: The records by financial accounting and management accounting shed light on the overall performance of the organization in financial or non-financial areas that ultimately reflect on its financial health.
Result Reports Reveal Overall Financial Standing: Irrespective of whether the statements are created on monthly, bi-annual or annual basis, the short term and long term reports derived by financial and management accounting teams suggest the financial condition of the firm. Both these departments emphasize on revealing the profit or loss situations.
Scope of Opportunities: The job opportunities, salary structure and prospects of financial and management accountant vary according to the nature of organization, policies, turn-over and economic conditions.

How is Cost Accounting Different from Financial and Management Accounting?

Cost accounting is another area that has garnered significant attention and undergone rapid change with influx of software tools that simplify practices related to cutting down costs in an organization. In fact, it is an area in accounting that relies on costing methods and principles to products, processes and projects to curb expenses, business costs and increase profitability.

Unlike financial and management accounting, the purpose of cost accounting is not to generate yearly, quarterly or monthly financial reports but, to identify cost per unit for every product, process or project undertaken.

Cost accounting includes comprehensive analysis of the differences between actual and estimated cost of transaction. However, it has same amount of significance that financial and management accounting have when it comes to powering decision-making processes in an organization.

Statements and calculation in cost accounting are done as per the requirements of the organizations as opposed to compulsory creation of reports and statements based on standard accounting practices in financial and management accounting.

Cost Accounting is Helpful for the Financial and Management Accounting Teams

Since cost accounting is mostly related to the ascertainment of the cost of operation or production, it offers a clear picture about wastages and redundancies in the organization. These reports can be addressed by the management accounting team to ensure there are promising results to be revealed at the end of the year by the financial management teams. Besides, cost accounting is mostly concerned about augmenting the operational and production capabilities of labour and inputs to positively reflect on the profitability goals of the firm.

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