Top 16 Difference between Financial accounting and Management accounting

Written by Sravan

Updated on:

” Accounting is a Language of Business”
– Warren Buffett

Financial Accounting Definition

Financial accounting is the Art of Recording, Classifying, and Summarizing business transactions in a significant manner and In terms of money, the transactions and Events which are in part at least of the Finacial character and Interpreting the results thereof.

Financial Accounting deals with Collecting data and will report on the business performance and its financial health through the Financial Statements.

The Financial Statements include:

1. Profit and Loss account (To ascertain business Profit or Loss)
2. Balance Sheet (To know What the Business Owns i.e. Assets & What the business Owes i.e. Liabilities)
3. Cash Flow Statement (To ascertain Total Inflow and Outflow of funds)
4. Notes to accounts (Interpretation for the items considered in the accounts)

Also Read: B Com Interview Question and Answers for Students

Management Accounting Definition

Management account is also a branch of Accounting. It deals with the Identification, measurement, and analysis of financial and non-financial information which helps management in decision-making to improve the efficiency and effectiveness of business operations.

Difference between Financial accounting and Management accounting

The top 15 differences between Financial accounting and Management accounting are as follows

S.No.Basis
of Difference
Financial
Accounting
Management
Accounting
1MeaningFinancial Accounting deals with overall financial transactions and prepares the Financial position of the business entity.Management accounting is primarily concerned with Management and it involves collecting and analyzing the financial and quantitative information.
2ObjectiveTo prepare periodical Financial Statements for the business.To help in the preparation of customized reports in making decisions for the management.
3UsersFinancial information will be used by internal users like Employees, Management and also by external users say Banks, Suppliers Customers etc.,
Eg: Banks will consider the Financials of business to sanction loans for any business.
Management Accounting information will be used only by internal users like Management.
4Reporting systemIt involves an external reporting system. It involves an internal reporting system.
5Statuatory
Requirement
For every public organization, it is mandatory to prepare the Financial statements of the company.There is no mandatory or statutory requirement to prepare Management reports.
6Accounting
Rules
It follows the Rules and Regulations as governed by Generally Accepted Accounting Principles (GAAP) as guided by Accounting Standard Board (ASB)There is no set of rules for preparing Management reports but it will be prepared as guided by the management.
7Time periodFinancial Statements will be prepared for a fixed time period of 1 year. It is usually on 31st March of every year.Management reports are usually prepared either Daily, Weekly, Monthly, Quarterly, or Yearly as and when required
8Type of
Reports
Financial Accounting consists of
1 – Profit and Loss Statement
2 – Balance Sheet
3 – Cash Flow Statement
There is no standard format or report to prepare it. As requested by the management the format will be changed.
9Verification of
Data
The financial information is 100% verifiable since these are prepared on Internal and external evidence.
Eg:
The purchase of Machinery of Rs.30 Lakhs will be supported by Invoice (External evidence) and Purchase Order (Internal evidence)
Management Accounting data is not 100% verifiable and sometimes verifiable
Eg:
Estimation of Production Forecast for 5 Years (Not verifiable)
Marketing Personnel Target vs Actuals for Last 5 years (Verifiable)
10FormatThere is a specific format for recording and presenting information through Financial Accounting.There is no specific format since all the reports are customizable as per the need and requirements of management.
Eg: Employee performance report
11ConfidentialityOnce the financial statements are prepared and published in the domain, there is no question of confidentiality. Users can pay a minimum amount to get it.Management Accounting data is 100% confidential as it contains business problems and secrets that will be shared among management people only. So, cannot be available in the public domain.
12Focus onIt focuses on Profitability of the businessIt focuses on specific management problem and their solution
Eg: Company’s Labour turnover rate is high, How to reduce it?
13OrientationFinancial accounting is concerned with financial results which were achieved earlier. Therefore, it has a historic orientationManagement accounting reports on Budgets and Forecasts. Therefore, it has a future orientation
14ValuationIt reports and asses the valuation of assets and Liabilities and also reports Impairments and revaluations of assets.It is not concerned with the value of items but it will focus only on productivity.
Eg: How efficiently a Machine is being utilized.
15StandardsFor recording Financial accounting, there are separate accounting standards.There are no set standards for preparing Management reports.
16AuditAs per the Companies Act, Companies are mandated to audit their books of accounts.It is not mandatory and it is not possible as the data is prepared on a projection basis.
Difference between financial accounting and management accounting

In summary, Financial accounting is useful for the business owners to the financial position of the business like whether profit earned or loss occurred over a period of time. Whereas, Management accounting extends its support to the owners in understanding and solving their specific business problems with their customizable reports.

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Author is a Qualified CMA with rich industry experience for more than 6 years. He is an All India Ranker (AIR-101) in CMA and also a Semi-Qualified Chartered Accountant having a quite good experience in teaching the subjects of Accounting and Costing to the commerce aspirants.

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