Before discussing about differences between financial accounting and management accounting, it is worthwhile to discuss about the similarities between financial accounting and management accounting.
Similarities between Financial & Management Accounting
The similarities between financial accounting and management accounting are given below:
1. Both are the parts of total accounting information system.
2. Economic events are dealt in the both system of accounts.
3. The economic events are qualified only in terms of rupees.
4. Both are concerned with financial statements, revenues, expenses, assets, liabilities and cash flows.
5. Both the system of accounts are accumulating and classifying the accounting information for the preparation of financial statements.
6. Some database is used for preparing financial statements and reports under both system of accounts.
7. Both are determining and measurement of costs for different accounting periods and even for different departments and sections.
8. The same accounting principles and concepts are used in both system of accounts for the purpose of cost accumulation and cost allocation.
Differences between Financial & Management Accounting
In spite of the above similarities, financial accounting and management accounting are differing in the following respects.
1. Definition: Financial Accounting is the process of recording revenues, expenses, assets and liabilities which are generally connected with the running business enterprise.
Management Accounting has been defined by the Association of Centrified and Corporates Accountants as,
“The application of accounting and statistical techniques to the specific purpose of producing and interpreting information designed to assist management in its function of promoting maximum efficiency and in envisaging, formulating and coordinating future plans and subsequently in measuring their execution”.
2. Users of Information: The financial accounting information are mainly used by the external to the business enterprise. The Management Accounting information are mainly used by the top level management executives of a business concern.
3. Usage: The Financial Accounting reports are not useful for planning, organizing, staffing, directing, controlling and decision-making. The Management Accounting reports are highly useful for proper planning, organizing, staffing, directing, controlling and decision-making.
4. Preparation of Reports: The same type of financial accounting reports are prepared and supplied to the outsiders include shareholders, creditors, financial analysts, government authorities, stock exchanges, trade unions etc. Under management accounting, different set of information is developed and prepared the reports for supply the same to different level of management executives.
5. Accounting Method: Financial Accounting follows the double entry system in business transaction such as recording, classification of business transaction and summarizing etc. Management Accounting is not based on double entry system.
6. Method of Preparing Accounting Information: Under financial accounting system, balances of all accounts are prepared and maintained in total for a particular period. In the case of management accounting system, information are gathered for department wise, section wise, division wise and the like for different purposes of business organization.
7. Accounting Principles: Generally Accepted Accounting Principles (GAAP) are important to financial accounting. Generally Accepted Accounting Principles (GAAP) are not important to management accounting.
8. Unit of Measurement: Unit of measurement is only rupees in the case of financial accounting. Any unit of measurement is followed in the case of management accounting.
9. Use of Historical Costs: Historical costs and past transactions are primarily necessary to financial accounting. Historical costs and past transactions are not much use to management. Hence, historical costs and past transactions are secondary necessary to management accounting.
10. Period of time: Generally, financial accounting is prepared for one year. Management accounting is prepared as and when required.
11. Statements and Reports: Financial Accounting statements and reports are prepared and presented at regular intervals. Management Accounting Statements and reports are prepared and presented only on the basis of planning, controlling and decision making needs.
12. Purposes of Report: Financial Accounting is prepared as overall performance of the company and presented before the potential investors, shareholders, customers, creditors, regulatory authorities, suppliers and employees for general purpose. Management Accounting is prepared for the specific needs of the department manager and/or Chief Executive Officer.
13. Concentration: Financial Accounting is concentrating only past events and results of the company. Management Accounting is concentrating future events i.e. likely to be happen events of the company.