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written by | September 1, 2022

Differences between Financial Accounting and Management Accounting

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A firm requires financial accounting to manage its financial operations and financial status towards the outside stakeholders. It involves summarising and recording various business-related transactions and preparing various reports with the financial data found or gathered. On the other hand, management accounting or managerial accounting is a recent accounting branch that addresses various administrative concerns. It is related to providing financial reports to the company's management to make them take accurate financial decisions for the company's benefit. So, the first difference between financial and management accounting is that financial accounting is responsible for maintaining business transactions. 

In contrast, management accounting provides data to the company's management so that they can make financial decisions to achieve the company’s goal and vision in the future.

Did you know? 

Management accounting helps in providing both Qualitative and Quantitative information to the top-level managers to help them in the decision-making of the firm, whereas financial accounting provides a true and fair view of the firm’s financial statements to external stakeholders.

Also read:  Accounting Information System Explained With Ais Full Form, Types & Examples

Basic functions of Financial Accounting

There are various functions of financial accounting, which are as follows:

  • Systematic Record of Transactions: Big corporations and large-sized firms have a large number of transactions taking place regularly, and remembering all these transactions is not possible, which is why financial accounting enables a systematic record of transactions chronologically through a journal, ledger and other books of accounts.
  • Analysing Transactions: The team involved in preparing various financial statements and books of accounts should analyse the transactions as and when they occur and summarise and check whether the transactions are true. If it is authentic, the transaction will be recorded to analyse the profit or loss of the company, and then prepare a trial balance and eventually summarise it in the form of a balance sheet.
  • Communicating the Transactions: The results of the financial reports and financial statements should be communicated to every company stakeholder. Financial reports and statements must be communicated to the company's stakeholders at the end of the financial year. The stakeholders are
  1. Shareholders
  2. Creditors 
  3. Lenders
  4. Bank Institutions
  • Meet the Legal Requirements:  The team involved in preparing Financial statements must follow all the relevant legal requirements preparing financial statements, like adherence to Indian Accounting Standards ( IND AS) or Generally Accepted Accounting Principles ( GAAP).

When discussing financial accounting vs management accounting, we have to also look at the functions of Management accounting to find out the key difference between financial accounting and management accounting. Let’s check out the functions of management accounting.

Basic Functions of Management Accounting

 There are various functions of management accounting, which are as follows:

  • Forecasting Cash Flow: Management accounting allows to predict or forecast the cash flow of a business. Management can take independent decisions for the benefit of the firm and can state different policies or corrective measures through which the management can increase the business's cash flow.
  • Forecasting the Company’s Future: Management accounting helps predict or forecast a company's future and where it will stand if it follows the same strategies. The firm will be able to predict the social, economic, political and technological changes happening in the industry or the business environment.
  • Analyses Return on Investments: Management accounting helps, through the information gathered in the form of data, how much they will get in return for their investments. It helps in analysing return in terms of money, reputation, growth and share in the market to their investments through the help of management accounting.
  • Analysing Variances in Performance: There can be substantial variances in the estimated performance of the business if it follows certain strategies and the actual performance that comes out. Management accounting helps in understanding the variances in performance and shows the corrective measures to rectify the variance in performance.
  • Outsourcing Decisions: Management accounting helps a business make necessary decisions on whether to create an environment or the infrastructure to achieve organisational goals or simply outsource the work. Management accounting helps the decision-makers to resolve this issue.

These were the basic functions of financial accounting and management accounting. Now let’s take a look at the difference between financial and management accounting.

Also read: Learn Cost and Management Accounting along with its Meaning, Objectives & Types

Difference Between Financial Accounting and Management Accounting

BASIS FOR COMPARISON

FINANCIAL ACCOUNTING

MANAGEMENT ACCOUNTING

Meaning

Financial Accounting is an accounting system that focuses on the preparation of a financial statement of an organisation to provide 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 the management accounting.

Type of Orientation

Historical in nature and based on past records and transactions

Future related in nature. to take decisions for the future of the company.

Users

Both internal and external users

Only internal users

Nature of statements prepared

General-purpose financial statements to show a true and fair view of a company

Special purpose financial statements to make specific decisions for the company

Rules and Regulations

Rules of GAAP, IND AS are followed

No fixed rules for the preparation of reports

Nature of reports

Only financial aspects of accounting

Both financial and non-financial aspects of accounting

Time Span given

Financial statements are prepared for a fixed period, i.e. one year.

Management Reports are prepared whenever needed.

Objectives 

To create periodical reports and judge the financial position of the firm.

To assist internal management in the planning and decision-making process by providing detailed information on various matters.

Publishing and auditing

Required to be published and audited by statutory auditors 

It is not meant to be published or audited. It is for internal use only.

Format of the financial statements

Specified by the respective authority or an institution and cannot deviate from the format

Not specified by any authority or an institution

These are the differences between financial accounting and management accounting. From the nature of statements prepared, objectives, rules and regulations to the format of financial statements, they differ from each other, which is distinctive from each other.

Key Differences and Similarities

There are many differences between financial and management accounting, but specific key differences need to be highlighted, which sets both financial and management accounting apart. These are:

  • Financial accounting is narrower than management accounting. Management accounting scope is wider and more pervasive.
  • Financial accounting objective is to show a firm's true and fair view to the company’s external stakeholders. The objective of management accounting is to ensure that the management makes effective decisions on behalf of the company's existing shareholders.
  • Financial accounting only measures and talks about quantitative data, whereas Management accounting measures and considers both quantitative and qualitative aspects.
  • Financial accounting is completely based on historical information, whereas management accounting is based on past predictions and historical information.

Apart from financial accounting and management accounting differences, there are many similarities between them, which are as follows:

  • Both accounting types co-exist to provide accounting information to the stakeholders and internal management.
  • Both accounting types are responsible for preparing financial reports for the firm.
  • For both the accounting types, one can easily ascertain the cost of various accounting periods, departments and sections.
  • The accounting types required education and basic expertise in accounting concepts.

Also read: Learn about Inventory Accounting - Meaning, Objectives, Types & Method

Conclusion

Financial accounting and management accounting are two different accounting aspects. To master these concepts, one should be educated with the basic concepts and relevant rules and standards related to accounting. 

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FAQs

Q: Differentiate financial accounting and management accounting concerning objectives, rules, and regulations?

Ans:

The objective of financial accounting is to show a true and fair view of the firm to external stakeholders. In contrast, the objective of management accounting is to assist internal management in taking futuristic decisions for the benefit of the company. Financial accounting follows certain fixed rules of GAAP and INDAS whereas management accounting does not follow any fixed rules.

Q: State a few key differences between financial accounting and management accounting?

Ans:

  • Some critical differences between financial and management accounting are:
  • Financial accounting is narrower when compared to Management accounting
  • Financial Accounting talks about quantitative data, whereas management accounting talks about both quantitative and qualitative data.

Q: State a few functions of management accounting?

Ans:

The functions of management accounting are:

  • It allows to predict and forecast the annual or periodic cash inflows of a company and suggests corrective measures to improve cash inflow
  • It allows the management to ascertain how much return they will receive for their investments.

Q: State a few functions of financial accounting?

Ans:

The functions of financial accounting are:

  • It involves a systematic record of transactions in chronological order
  • It involves meeting legal requirements like GAAP and IND AS while preparing financial statements. 

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The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.