Major difference between financial accounting and management accounting is of users, financial accounting ensures proper accounted of a business assets and liabilities to shareholders, tax authorities etc. while management accounting is responsible of providing information to employee and manager of company for proper plan and decision making.

Financial accounting and management accounting are closely interlinked with each other because data compiled in form of financial statement use by management accounting for managerial purpose.

 

Financial Accounting

Definition

Financial accounting is the branch of accounting which deals in providing financial information about business or any other organization including charity or government so that decision maker who are not part of organization i.e. external users easily access financial health of a company.

OR

It is process of summarizing, recording, classifying and analyzing the financial data according to generally accepted accounting principal (GAAP) for external user to make better decision.

 

Explanation

Financial accounting rules are set by FASB (Financial Accounting Standard Board), it is an independent board having accounting professional whom responsibilities is to set rules and standard for financial accounting and gave its reporting to United States.

Financial accounting broadly consist of:

  • Formation of financial information
  • Use of created financial information

Main focus of financial accounting is on creation of financial information mainly for external users groups in which lenders, creditors, shareholder, investor, potential investors, customers, tax authorities and so on. These groups need to know whether their past performance are good or they have cases of bankruptcy. It also have link with business occasions occurred before and have their historic nature. It is way to portray financial information to every external users about an organization. It enables the external users to make informed decisions.

Example

Consider a large corporation, currently have 600,000 shareholder and off course the owner are called shareholder.

Want to disclose their personal information to all shareholder. So shareholder most of their decision taking rights to company’s board of director and corporation.

Shareholder need information because of two reason:

 

Management Accounting

Definition

According to Richard M.S Wilson and Wai Fong Chua:

Management or managerial accounting involve in both financial and non-financial activities to provide relevant information to people within a company i.e. internal groups so that they can make better decision for company to achieve company’s goal and enhance company’s effectiveness

 

Explanation

Management accounting is mainly used by management of company for making plan, evaluate performance and look to integrity of financial information. Management accounting is not static process, because they have to evaluate continuously the internal condition of company. The concept of management accounting is increasing day by day because it is one of the finest asset for company. Now a days management accounting stick themselves in decision making process and providing solution of ad hoc problems. Major responsibilities of management accountant include safeguard assets of company, making policies and procedure and coordinate with the related authorities.

Example

As managerial accounting (sometimes refer to as cost accounting) helps insiders to make better decision by providing accounting information. In case that if a company is willing to launch a new product, managerial accounting will guide the organization to launch the product by using different tools and techniques like;

  • Product Pricing
  • Activity Based Costing
  • Standard Costing

 

Difference between Financial Accounting and Management Accounting

Financial AccountingManagement Accounting
Financial accounting can be effectively for both external and internal users of accounting.Management accounting is only effective for internal group i.e. for managers and employees of a company.
Financial accounting use double entry system in their reports.Management accounting reports not use double entry system.
Financial accounting give main emphasis on explanation.Management accounting give main emphasis on control and planning.
Financial accounting is governed by company law.Management accounting is control by mangers of company.
Only financial data required in financial accounting.Operational and financial data both are required in management accounting.
Quantitative in nature.Qualitative in nature.
Its main function is analyzing, summarizing and publication of financial statements.Provide information to within organization for decision making process.
Report of financial accounting portrays whole picture of entity.Report of management accounting portrays details of entity’s part.
1. Balance sheet
2. Income statement
3. Cash flow statement
1. Departmental report
2. Sales report
3. Inventory reports
Frequency of financial accounting report is quarterly or annually.Frequency of management accounting report is
According to requirement of company.
Its main purpose is to help external users to make investment and other decision.Its main purpose is to help internal users to make plan and to control decision process.
Financial reports are audited by Certified Public Accountant (CPA).No audit is required for management accounting.
Report must be verifiable and consistence.Report must be understandable, useful and relevant.
Annual or final report is mandatory.Annual or final report is not mandatory.
Its main focus is on history.Its main focus is on present and future.

 

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References

Mukharji, A., & Hanif, M. (2003). Financial Accounting (Vol. 1). New Delhi: Tata McGraw-Hill Publishing Co.

Narayanswami, R. (2008). Financial Accounting: A Managerial Perspective. (3rd, Ed.) New Delhi: Prentice Hall of India.

Ramchandran, N., & Kakani, R. K. (2007). Financial Accounting for Management. (2nd, Ed.) New Delhi: Tata McGraw Hill.

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