Relationship between Financial Accounting and Management Accounting


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Financial accounting and management accounting are two major sub-systems of accounting information system. Both are concerned with revenues and expenses, assets and liabilities and cash flows. Both therefore involve financial statements. But the major differences between the two arise because they serve different audiences. The main points of difference between the two are as follows:

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Basis

Financial Accounting

Management Accounting

1. External and

Internal users

Financial accounting information is mainly intended for external users like investors, shareholder, creditors, Govt. authorities etc. Management accounting information is mainly meant for internal user, i.e., management
2. Statutory

requirements

Under company law and tax law, financial accounting is obligatory to satisfy various statutory provisions. Management accounting is optional though its utility makes it highly desirable to adopt it.
3. Analysis of

cost and profit

Financial accounting shows the profit / loss of the business as a whole. It does not show the cost and profit for individual products, processes or departments, etc. Management accounting provides detailed information about individual products, plants, departments or any other responsibility centre.
4.Past and

future data

It is concerned with recording transactions, which have already taken place, i.e., it represents past or historical records. It is future oriented and concentrates on what is likely to happen in future though it may use past data for future projections.
5. Periodic and

continuous reporting

Financial reports, i.e., Profit and Loss account and Balance Sheet are prepared usually on a year to year basis. Management accounting reports are prepared frequently, i.e, these may be monthly, weekly or even daily depending on managerial requirements
6. Accounting

standards

Companies are required to prepare financial accounts according to accounting standards issued by the Institute of chartered accountants of India. Management accounting is not bound by accountings standards. It may use any practice which generates useful information to management.
7.Types of

statements prepared

Financial accounting prepares general purpose statements Profit & Loss account and Balance sheet which are used by external users. In Management accounting special purpose reports are prepared, eg,, performance report of sales manager or any other department manager which are used by top level Management.
8.Pubilcation and

audit

Financial statements, i.e., P&L A/c and Balance sheet are published for general public use and also sent to share holders. These are required to be audited by the chartered Accountants. Management accounting statements are for internal use and thus neither published for general public use nor these are required to be audited by chartered accountants.
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We, at BMS.co.in, believe in sharing knowledge and giving quality information to our BMS students. We are here to provide and update you with every details required by you BMSites! If you want to join us, please mail to contact@bms.co.in.

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