Management A/c Vs.Financial A/c

 

MANAGEMENT ACCOUNTING AND FINANCIAL ACCOUNTING

 

Financial accounting and management accounting are closely interrelated since management accounting is to a large extent rearrangement of the data provided by financial accounting. Moreover, all accounting is financial in the sense that all accounting systems are in monetary terms and management is responsible for the contents of the financial accounting statements. In spite of such a close relationship between the two, there are certain fundamental differences. These differences can be laid down as follows:

(i) Objectives: Financial accounting is designed to supply information in the form of profit and loss account and balance sheet to external parties like shareholders, creditors, banks, investors and Government. Information is supplied periodically and is usually of such type in which management is not much interested. Management Accounting is designed principally for providing accounting information for internal use of the management. Thus, financial accounting is primarily an external reporting process while management accounting is primarily an internal reporting process.

(ii) Analyzing performance: Financial accounting portrays the position of business as a whole. The financial statements like income statement and balance sheet report on overall performance or statues of the business. On the other hand, management accounting directs its attention to the various divisions, departments of the business and reports about the profitability, performance, etc., of each of them. Financial accounting deals with the aggregates and, therefore, cannot reveal what part of the management action is going wrong and why. Management accounting provides detailed analytical data for these purposes.

(iii) Data used: Financial accounting is concerned with the monetary record of past events. It is a post-mortem analysis of past activity and, therefore, out the date for management action. Management accounting is accounting for future and, therefore, it supplies data both for present and future duly analyzed in detail in the ‘management language’ so that it becomes a base for management action.

(iv) Monetary measurement: In financial accounting only such economic events find place, which can be described in money. However, the management is equally interested in non-monetary economic events, viz., technical innovations, personnel in the organization, changes in the value of money, etc. These events affect management’s decision and, therefore, management accounting cannot afford to ignore them. For example, change in the value of money may not find a place in financial accounting on account of “going concern concept”. But while affecting an insurance policy on an asset or providing for replacement of an asset, the management will have to take into account this factor.

(v) Periodicity of reporting: The period of reporting is much longer in financial accounting as compared to management accounting. The Income Statement and the Balance Sheet are usually prepared yearly or in some cases half-yearly. Management requires information at frequent intervals and, therefore, financial accounting fails to cater to the needs of the management. In management accounting there is more emphasis on furnishing information quickly and at comparatively short intervals as per the requirements of the management.

(vi) Precision: There is less emphasis on precision in case of management accounting as compared to financial accounting since the information is meant for internal consumption.  

(vii) Nature: Financial accounting is more objective while management accounting is more subjective. This is because management accounting is fundamentally based on judgement rather than on measurement.

(viii) Legal compulsion: Financial accounting has more or less become compulsory for every business on account of the legal provisions of one or the other Act. However, a business is free to install or not to install system of management accounting.

 

The above points of difference between Financial Accounting and Management Accounting prove that Management Accounting has flexible approach as compared to rigid approach in the case of Financial Accounting. In brief, financial accounting simply shows how the business has moved in the past while management accounting shows how the business has to move in the future.

 

 

 

cost accounting financial and management ac 2nd year bcca

 

 

 

 

 

Registration


A password will be e-mailed to you.

Feedback Form

Name (required)

Email (required)

Feedback