” 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 |
|---|---|---|---|
| 1 | Meaning | Financial 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. |
| 2 | Objective | To prepare periodical Financial Statements for the business. | To help in the preparation of customized reports in making decisions for the management. |
| 3 | Users | Financial 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. |
| 4 | Reporting system | It involves an external reporting system. | It involves an internal reporting system. |
| 5 | Statuatory 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. |
| 6 | Accounting 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. |
| 7 | Time period | Financial 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 |
| 8 | Type 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. |
| 9 | Verification 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) |
| 10 | Format | There 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 |
| 11 | Confidentiality | Once 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. |
| 12 | Focus on | It focuses on Profitability of the business | It focuses on specific management problem and their solution Eg: Company’s Labour turnover rate is high, How to reduce it? |
| 13 | Orientation | Financial accounting is concerned with financial results which were achieved earlier. Therefore, it has a historic orientation | Management accounting reports on Budgets and Forecasts. Therefore, it has a future orientation |
| 14 | Valuation | It 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. |
| 15 | Standards | For recording Financial accounting, there are separate accounting standards. | There are no set standards for preparing Management reports. |
| 16 | Audit | As 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. |
Conclusion
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.
Thanks for reading 🙂
