Finance and cloud accounting

Management Account VS Financial Account

financial vs management accounting ‘Accounting’ is a process of systematically identifying, recording, classifying, reporting, analyzing and interpreting the results thereof to the users of the financial statement. The two major branches of Accounting are Financial Accounting and Management Accounting. The former, is an accounting system which gives true and a fair view of the financial position of the company to various parties. The latter, is an accounting system which provides both the quantitative and qualitative information to the managers. Here we are going to discuss about the differences between Financial Accounting and Management Accounting.

Comparison Chart

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
Objective To provide financial information to outsiders. To assist the management in planning and decision making process by providing detailed information on various matters.
Format Specified Not specified
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.

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 is done, in order to provide relevant and material information to its users.

Financial Accounting is based on various assumptions, principles and convention like going concern, materiality, matching, realization, conservatism, consistency, accrual, historical cost etc. The financial statement consist 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 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.

Key Differences Between Financial Accounting and Management Accounting

The following are the major differences between financial accounting and management accounting:

  1. Financial Accounting is the branch of accounting which keeps tract of all the financial information of the entity. Management Accounting is that branch of accounting which records and reports both the financial and non financial information of an entity.
  2. 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.
  3. Financial accounting is to be publicly reported whereas the Management Accounting is for the use of the organization and hence it is very confidential.
  4. Financial Accounting is done in the prescribed format, whereas there is no prescribed format for the Management Accounting.
  5. 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.
  6. The financial accounting is mainly done for a specific period, which is normally 1 year. On the other hand, the management accounting is done as per the needs of the management say quarterly, half yearly etc.
  7. Financial accounting is a must for any company for auditing purposes. On the contrary, management accounting is voluntary, as no editing is done.

Similarities

  • Used by the Internal Management.
  • Evaluation of Performance.
  • Branch of Accounting.
  • Presents the position of entity.

Conclusion

Financial accounting and Management accounting are of great significance, in fact, they help the organization in various ways. As financial accounting is helpful in the proper record keeping of in-numerous transactions and comparison of performance of two periods of an entity or between the two entities, while the management accounting is helpful in analyzing the performance, making a strategy, taking an effective judgement and preparation of policies for the future.

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