Financial Accounting And Management Accounting
The terms financial accounting, and management accounting, are not prices description of the activities they comprise. All accounting is financial in the sense that all accounting systems are in monetary terms and management, of course, is responsible for the content of financial accounting reports. Despite this close interrelation, there are some fundamental differences between the two and they are:
- Subject Matter : Managements need to focus attention on internal details is the origin of the basic differences between financial accounting and management accounting. In financial accounting, the enterprise as a whole is dealt with while, in management accounting, attention is directed towards various parts of the enterprise which is regarded mainly as a combination of these segments. Thus financial statements, like balance-sheets and income statements, report on the overall status and performance of the enterprise but most management accounting reports are concerned with departments products, type of inventories, sales or other sub-division of business entity.
- Nature – Financial accounting is concerned almost exclusively with historical records whereas management accounting is concerned with the future plans and policies. Management’s interest in the past is only to the extent that it will be of assistance in influencing company’s future. The historical nature of financial accounting can be easily understood in the context of the purposes for which it was designed but management accounting does not end with the analysis of what has happened in the past and extends to the provision of information for use in improving results in future.
- Dispatch – In Management Accounting, there is more emphasis on furnishing information quickly then is the case with financial accounting. This is so because up-to-date information is absolutely essential as a basis for management action and management accounting would lose much of its utility if information required the time lag between the end of accounting period and the preparation of accounting records for the same, it has not been, and cannot be, totally eliminated.
- Characteristics – Financial accounting places great stress on those qualities in information which can command universal confidence, like objectivity, validity absoluteness, etc. whereas management accounting emphasizes those characteristics which enhance the value of information in a variety of uses, like flexibility, comparability etc. This difference is so important that a serious doubt has been raised as to whether both the types of characteristics can be preserved within the same framework.
- Type of Data Used Financial accounting makes use of data which is historical quantitative, monetary and objective, on the other hand management accounting used data which is descriptive, statistical subjective and relates to future. Therefore management accounting is not restricted, as financial accounting is, to the presentation of data that can be certified by independent auditors.
- Precision – There is less emphasis in precision in management accounting because approximations are often as useful as figures worked out accurately.
- Outside Dictates – As financial accounting ahs been assigned the role of a reference safeguarding the interests of different parties connected with the operation of a modern business undertaking, outside agencies have laid down standards for ensuring the integrity of information processed and presented in financial accounting statements. Consequently, financial accounting statements are standardized and are meant for external use. So, far as management accounting is concerned, there is no need for clamping down such standards for the preparation and presentation of accounting statements as management is both the initiator and user of data. Naturally, therefore, management accounting can be smoothly adapted to the changing needs of management.
- Element of compulsion – These days, for every business, financial accounting has become more or less compulsory indirectly if not directly, due to a number of factors but a business is free to install, or not to install, a system of management accounting.