Difference between Financial Accounting and Management Accounting

Accounting, refers to the process of recording, classifying and summarizing in monetary

terms, the business transactions and events and interpreting the results. It is used by
entities to keep a track of their financial transactions. Financial Accounting and
Management accounting are the two branches of accounting. Financial accounting stresses
on giving true and a fair view of the financial position of the company to various parties.

On the contrary, management accounting aims at providing both qualitative and

quantitative information to the managers, so as to assist them in decision making and thus
maximizing the profit. This article excerpt is created to help you learn the significant
differences between financial accounting and management accounting.

Comparison Chart

BASIS FOR
FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING
COMPARISON

Meaning Financial Accounting is an The accounting system which provides

accounting system that focuses on relevant information to the managers
the preparation of financial to make policies, plans and strategies
statement of an organization to for running the business effectively is
provide the financial information to known as Management Accounting.
the interested parties.

Is is Yes No
compulsory?

Information Monetary information only. Monetary and non-monetary

information

Objective To provide financial information to To assist the management in planning

outsiders. and decision making process by
providing detailed information on
various matters.

Format Specified Not specified

Time Frame Financial Statements are prepared The reports are prepared as per the
at the end of the accounting period need and requirements of the
which is usually one year. organization.

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BASIS FOR
FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING
COMPARISON

User Internal and external parties Only internal management.

Reports Summarized Reports about the Complete and Detailed reports

financial position of the regarding various information.
organization

Publishing and Required to be published and Neither published nor audited by

auditing audited by statutory auditors statutory auditors.

Definition of Financial Accounting

Financial Accounting is an accounting system which is concerned with the preparation of

financial statement for the outside parties like creditors, shareholders, investors, suppliers,
lenders, customers, etc. It is the purest form of accounting in which proper record keeping
and reporting of financial data are done, to provide relevant and material information to its
users.

Financial Accounting is based on various assumptions, principles and convention like going
concern, materiality, matching, realisation, conservatism, consistency, accrual, historical
cost, etc. The financial statement consists of a Balance Sheet, Income Statement and Cash
flow statement which are prepared as per the guidelines provided by the relevant statute.

Normally, the statements based on the financial accounting are prepared for one accounting
year, to enable the user to make comparisons regarding the financial position, profitability
and performance of the company in a specific period. Not only external parties but internal
management also gets information for forecasting, planning, and decision making.

Definition of Management Accounting

Management Accounting, also known as Managerial Accounting is the accounting for

managers which helps the management of the organisation to formulate policies and
forecasting, planning and controlling the day to day business operations of the organisation.
Both the quantitative and qualitative information are captured and analysed by the
management accounting.

The functional area of management accounting is not limited to providing financial or cost
information only. Instead, it extracts the relevant and material information from financial
and cost accounting to assist the management in budgeting, setting goals, decision making,
etc. The accounting can be done as per the requirement of the management, i.e. weekly,
monthly, quarterly, etc. and there is no format set on the basis of which it is to be reported.
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Key Differences between Financial Accounting and Management Accounting

The following points explain the major differences between financial accounting and
managerial accounting:

1. Meaning- Financial Accounting is the branch of accounting which keeps track of all
the financial information of the entity. Management Accounting is that branch of
accounting which records and reports both the financial and nonfinancial
information of an entity.
2. Users of financial accounting are both the internal management of the company and
the external parties while the users of the management accounting are only the
internal management.
3. Financial accounting is to be publicly reported whereas the Management Accounting
is for the use of the organisation and hence it is very confidential.
4. Only monetary information is contained in financial accounting. As against this,
management accounting contains both monetary and non-monetary information
such as the number of workers, the quantity of raw material used and sold, etc.
5. Financial Accounting is done in the prescribed format, whereas there is no
prescribed format for the Management Accounting.
6. Financial Accounting focuses on providing information about the functioning of the
entity’s business to its users, whereas Management Accounting focuses on providing
information to help them in evaluating the performance and devising plans for the
future.
7. The Financial Accounting is mainly done for a specific period, which is usually one
year. On the other hand, the management accounting is done as per the needs of
the management say quarterly, half yearly, etc.
8. Financial accounting is a must for any company for auditing purposes. On the
contrary, management accounting is voluntary, as no editing is done.
9. Financial accounting information is required to be published and audited by
statutory auditors. Unlike, management accounting, which does not require
information to be published and audited, as they are for internal use only.

Similarities

 Used by the Internal Management.

 Evaluation of Performance.
 Branch of Accounting.
 Presents the position of the entity.

Conclusion

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Financial Accounting and Management Accounting are of great significance, in fact, they
help the organisation in various ways. As financial accounting is helpful in the proper record
keeping of in numerous transactions and comparison of the performance of two periods of
an entity or between the two entities, while the management accounting is helpful in
analysing the performance, making a strategy, taking an effective judgement and
preparation of policies for the future.

Difference between Cost Accounting and Management Accounting

Cost accounting is that branch of accounting which aims at generating information to

control operations with a view to maximizing profits and efficiency of the company, that is
why it is also termed control accounting. Conversely, management accounting is the type of
accounting which assist management in planning and decision-making and thus known as
decision accounting.

The two accounting system plays a significant role, as the users are the internal
management of the organization. While cost accounting has a quantitative approach, i.e. it
records data which is related to money, management accounting gives emphasis on both
quantitative and qualitative data. Now, let’s understand the difference between cost
accounting and management accounting, with the help of given article.

Comparison Chart

BASIS OF
COST ACCOUNTING MANAGEMENT ACCOUNTING
COMPARISON

Meaning The recording, classifying and The accounting in which the both
summarising of cost data of an financial and non-financial information
organisation is known as cost are provided to managers is known as
accounting. Management Accounting.

Information Type Quantitative. Quantitative and Qualitative.

Objective Ascertainment of cost of Providing information to managers to

production. set goals and forecast strategies.

Scope Concerned with ascertainment, Impart and effect aspect of costs.

allocation, distribution and
accounting aspects of cost.

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BASIS OF
COST ACCOUNTING MANAGEMENT ACCOUNTING
COMPARISON

Specific Procedure Yes No

Recording Records past and present data It gives more stress on the analysis of
future projections.

Planning Short range planning Short range and long range planning

Interdependency Can be installed without Cannot be installed without cost

management accounting. accounting.

Definition of Cost Accounting

Cost Accounting is a method of collecting, recording, classifying and analyzing the

information related to cost. The information provided by it is helpful in the decision-making
process of managers. There are three major elements of cost which are material (direct &
indirect), labour (direct & indirect) and overhead (Production, Office & Administration,
Selling & Distribution, etc.).

The main aim of the cost accounting is to track the cost of production and fixed costs of the
company. This information is useful in reducing and controlling various costs. It is very
similar to financial accounting, but it is not reported at the end of the financial year.

Definition of Management Accounting

Management Accounting refers to the preparation of financial and non-financial

information for the use of management of the company. It is also termed as managerial
accounting. The information provided by it is helpful in making policies and strategies,
budgeting, forecasting plans, making comparisons and evaluating the performance of the
management.

The reports produced by management accounting are used by the internal management
(managers and employees) of the organisation, and so they are not reported at the end of
the financial year.

Key Differences between Cost Accounting and Management Accounting

1. The accounting related to the recording and analysing of cost data is cost accounting.
The accounting related to the producing information which is used by the
management of the company is management accounting.
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 2. Cost Accounting provides quantitative information only. On the contrary,
Management Accounting provides both quantitative and qualitative information.
3. Cost Accounting is a part of Management Accounting as the information is used by
the managers for making decisions.
4. The primary objective of the Cost Accounting is the ascertainment of cost of
producing a product, but the main objective of the management accounting is to
provide information to managers for setting goals and future activity.
5. There are specific rules and procedure for preparing cost accounting information
while there is no specific rules and procedures in case of management accounting
information.
6. The scope of Cost Accounting is limited to cost data however the Management
Accounting has a wider area of operation like tax, budgeting, planning and
forecasting, analysis, etc.
7. Cost accounting is related to ascertainment, allocation, distribution and accounting
face of cost. On the flip side, management accounting is associated with impact and
effect aspect of cost.
8. Cost accounting stresses on short-range planning, but management accounting
focuses on long and short range planning, for which it uses high level techniques
such as probability structure, sensitivity analysis etc.
9. While management accounting can’t be installed in the absence of cost accounting,
cost accounting has no such requirement; it can be installed without management
accounting.

Similarities

 Branch of Accounting
 Helpful in decision-making
 Prepared for a particular period.
 Not reported at the end of the financial year.

Conclusion

Both the cost accounting and management accounting are a part of accounting. They are
helpful in for ensuring the smooth and efficient running of the business. On the basis of the
information provided by the two entities various analysis are conducted. Cost accounting
aims at reducing extra expenditure, eliminating unnecessary costs and controlling various
costs. On the other hand management accounting aims at the planning of policies, strategy
formulation setting goals, etc. Small business owners are faced with countless decisions
every business day. Managerial accounting information provides data-driven input to these
decisions, which can improve decision-making over the long term. Small business managers

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can leverage this powerful tool to help make their business more successful by
understanding how management accounting benefits common business decision contexts.

Relevant Cost Analysis

Managerial accounting information is used by company management to determine what
should be sold and how to sell it. For example, a small business owner may be unsure where
he should focus his marketing efforts. To evaluate this decision, an accounting manager
could examine the costs that differ between advertising alternatives for each product,
ignoring common costs. This process is known as relevant cost analysis and is a technique
that is taught in basic managerial accounting courses. The same process can be used to
determine whether to add product lines or discontinue operations.

Activity-based Costing Techniques

Once the company has determined what products to sell, the business needs to determine
to whom they should sell the products. By using activity-based costing techniques, small
business management can determine the activities required to produce and service a
product line. Embedded in this information is the cost of customers. Deciding which
customers are more or less profitable allows the business owner to focus advertising toward
the consumers who are the most profitable.
Make or Buy Analysis

A primary use of managerial accounting information is to provide information used in

manufacturing. For example, a small business owner may be considering whether to make
or buy a component needed to manufacture the company's primary product. By completing
a make or buy analysis, she can determine which choice is more profitable. While this
technique is certainly useful, small business owners should only use these analyses as a
factor in the decision. There could be other non-financial metrics that are important to
consider that would not be part of the analysis.
Utilizing the Data

Managerial accounting information provides a data-driven look at how to grow a small

business. Budgeting, financial statement projections and balanced scorecards are just a few
examples of how managerial accounting information is used to provide information to help
management guide the future of a company. By focusing on this data, managers can make
decisions that aim for continuous improvement and are justifiable based on intelligent
analysis of the company data, as opposed to gut feelings.

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Tools and techniques of Management Accounting

Tools of Management Accounting

The various tools used at present in management accounting may be classified into the
following groups. They are:

1. Based on Financial Accounting Information

 Analysis of Financial Statements through Ratio Analysis.
 Analysis of Financial Statements through comparative statements, trend, graph and
diagram.
 Fund flow and cash flow analysis.
 Return on capital employed techniques.

2. Based on Cost Accounting Information

 Marginal costing (including cost volume profit analysis).
 Direct or incremental Costing and differential costing.
 Standard Costing.
 Analysis of Cost Variances.

3. Based on Mathematics
 Operations Research.
 Linear Programming.
 Network analysis.
 Queing theory and Games Theory.
 Simulation Theory.

4. Based on Future Information

 Budget and Budgeting.
 Budgetary control: Analysis of Budget Variance / Revenue Variance.
 Business Forecasting.
 Project Appraisal or Evaluation.
5. Miscellaneous Tools
 Managerial Reporting.
 Integrated Auditing.
 Financial Planning.
 Revaluation Accounting.
 Decision making Accounting.
 Management Information System.

Important tools and techniques used in management accounting

Some of the important tools and techniques are briefly explained below.

1. Financial Planning

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The main objective of any business organization is maximization of profits. This objective is
achieved by making proper or sound financial planning. Hence, financial planning is
considered as best tool for achieving business objectives.

2. Financial Statement Analysis

Profit and Loss account and Balance Sheet are important financial statements.
These statements are analyzed for different period. This type of analysis helps the
management to know the rate of growth of business concern. This analysis is done through
comparative financial statements, common size statements and ratio analysis.

3. Cost Accounting
Cost accounting presents cost data in product wise, process wise, department wise, branch
wise and the like. These cost data are compared with predetermined one. This comparison
of two costs enables the management to decide the reasons responsible for the difference
between these costs.

4. Fund Flow Analysis

This analysis find out the movement of fund from one period to another. Moreover, this
analysis is very useful to know whether the fund is properly used or not in a year when
compared to the previous year. The working capital changes and funds from operation are
also find out through this analysis.

5. Cash Flow Analysis

The movement of cash from one period to another can be find out through this analysis.
Besides, the reasons for cash balance and changes between two periods are also find out. It
studies the cash from operation and the movement of cash in a period.

6. Standard Costing
Standard costing is predetermined cost. It provides a yard stick for measuring actual
performance. It is used to find the reasons for the deviations if any.

7. Marginal Costing
Marginal costing technique is used to fix the selling price, selection of best sales mix, best
use of scarce raw materials or resources, to take make or buy decision, acceptance or
rejection of bulk order and foreign order and the like. This is based on the fixed cost,
variable cost and contribution.

8. Budgetary Control
Under Budgetary control techniques, future financial needs are estimated and arranged
according to an orderly basis. It is used to control the financial performances of business
concern. Business operations are directed in a desired direction.

9. Revaluation Accounting
The fixed assets are revalued as per the revaluation accounting method so that the capital is
properly represented with the assets value. It helps to find out the fair return on capital
employed.
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10. Decision-making Accounting
A business problem can be solved by choosing any one of the best and most profitable
alternative. To select such alternative, the relevant costs are compared. Thus, accounting
information are used to solve the business problem which are arising out of increasing
complexity of nature of business.

11. Management Information System

The free flow communication within the organization is essential for effective functioning of
business. Hence, the management can design the system through which every employee of
an organization can assess the information and used for discharging their duties and taking
quality decisions.

12. Statistical Techniques

There are a lot of statistical techniques used in removing management problems. Methods
of least square, regression and quality control etc. are some examples of statistical
techniques.

13. Management Reporting

The management accountant is preparing the report on the basis of the contents of profit
and loss account and balance sheet and submit the same before the top management. Thus
prepared reports disclose the strength and weakness indifferent areas of operating activities
and financial activities. These identification are highly useful to management for exercising
control and decision-making.
14. Historical Cost Accounting
It means that costs are recorded after being incurred. This is used for comparing with
predetermined costs to evaluate performance.

15. Ratio Analysis

It is used to management in the discharge of its basic functions of forecasting, planning,
coordination, communication and control. It paves the way for effective control of business
operations by undertaking an appraisal of both the physical and monetary targets.

Advantages of Management Accounting:

Management accounting has various advantages. Through an effective management

accounting system, it is possible to enhance the overall performance of the company. Let us
have a look at the advantages of management accounting.

1. Increases Efficiency of the company:

Companies opt for Management accounting as it increases the efficiency of company in

performing operations. It contributes in striving for better performance by evaluating and
comparing. Management accounting makes it easier to achieve various results. This
indirectly motivates the employees to strive for better performance. As a result, they

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receive rewards in the form of promotions. Thus, management accounting indirectly
increases the efficiency of the company at a whole.

2. Increases the bar of Profitability:

Management accounting includes budgetary control and capital budgeting. The use of this
method makes it easier for the company to cut short the extra expenditure for performing
vital operations. This indirectly increases the bars of profits for the company, as the
company is able to reduce its pricing on the products.

3. Simplifies the decision making in Financial Statements:

Managerial decisions and other activities of management require a simplified report of the
financial statement of the company. For this action, management accountant creates a
detailed technical report with simpler interpretations. Here, he represents the key facts of
the financial statements. This enables the managing officers to take up appropriate
decisions for the betterment of the company.

4. Enables the fluctuation of business monetary fund:

One of the essential factors in business is the monetary fund. Management accounting
enables a control over the fluctuation of this monetary fund. Management accounting
studies the flow of the funds in detail. Moreover, it helps in maintaining the emergency fund
in case of any urgency. Further, it also helps in eliminating any source within the company
that misuses the fund. After all, emergency preparation should always be kept aside before
setting up any business.

5. Cost transparency:

In the corporate world, majority of the costs come from the Information Technology (IT).
The work of management accounting in the firm is to work with the IT department closely.
This action ensures a within budget actions and provides cost transparency to the company.

6. Flexibility and freedom:

Management accounting system is of flexible nature. These reports do not require to be

made yearly, monthly, or weekly. Therefore, the accountant gets enough time to prepare a
perfect report.

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7. Assist in goal completion (Objectives):

The objective of the report presented by the management accountant is to assist

in achieving a long-term goal. It becomes possible to achieve the goal due to the detailed
information of the management accountant, which highlights the strong and weak points of
the company. In addition, this information helps to identify the weakness and takes
measures to overcome them.

8. Future prediction from past result:

Every new system that evolves for the corporate world has a single motive. It is to attain
success in the competitive market. With similar intend, management accounting system also
strives for betterment in performance. Thus, with the help of given data of the past (of the
company), it provides a chance to prepare for better future results.

9. Advanced technique and features:

The reasons because of which the management system seems reliable are the special tools
and technique. To form an accurate and valid report special techniques like budget
controlling, marginal costing, control accounting, etc are used. Use of the technique may
differ according to the issue at hand. However, this technique makes it easier to make
decisions in the favour of the company.

10. Marginal costing:

Marginal costing is possible with the aid of management accountant. It fixes the selling price
of the products created in the organization. Further, it also suggests several ways to use the
scarce materials and resources. It also recommends actions based on fixed cost,
contribution and other extras.

Although management accounting does not promise perfect decisions, they do increase the
chances of taking effective and efficient decisions.

Disadvantages of Management Accounting:

Advantages always bring along certain disadvantages too. Although management

accounting system has various advantages but no one can ignore the disadvantages. Let us
peep into the drawbacks of management accounting.

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1. Based on manually maintained records:

Management accounting system requires the information related to financial and cost
accounting. The records prepared by the management accounting officers are based on the
maintained records. Thus, the efficiency of the records presented relies upon the accuracy
of the records that are maintained.

2. Biased interpretation:

Personal interpretation matters a lot when it comes to decision taking. The preparation of
these reports by the management officer is based on the capability of interpretation and
understanding. Prejudices and biased knowledge of the subject makes it impossible for the
company to come to an accurate decision. Thus, it becomes impossible to get effective
results at the end of the day.

3. Deficiency of various vital skills of management accountant:

Job description of management accountant includes subjects like financial accounting, cost
accounting, economics, and statistics. Further, he or she should have an insight on a bit of
psychology and sociology. Lack of knowledge regarding these subjects may affect the
outcome of the management accounting. Thus, for a better working of management
accounting, it is essential for the accountant to have a clear knowledge of the required
subjects.

4. Cannot recommend a particular action:

Various alternatives for problem solving are presented before the management. These
alternatives can be effective or non-effective. Management accountant’s function is to
select any one of the alternatives or toss out all of the given measures. Thus, management
can only suggest a certain action; however, it cannot guarantee its effectiveness.

5. Preferences depend upon intuition and experience:

The management accounting works upon a set scientific concept. However, following
scientific guidelines becomes too much of a hassle. Moreover, scientific decision-making is a
complex technique of management accounting. Thus, the preference is given to intuition
and experience at all times. It comparatively becomes easier to make decisions.

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6. Management Accounting has its own limitations:

A management accounting system is merely a tool that facilitates the management

accountant in giving advice for decision-making. However, the implementation of the
actions that are advised depends upon the follow up action of the management. Thus,
management accounting is limited to giving suggestions.

7. Participation and efforts matter:

Management accounting system is a Tool that provides solution. However, the way of
applying that solution also matters. Thus, for better results giving full efforts and
participation in the task is required. To attain overall success it is important for all the
employees from different levels to give their full inputs.

8. Broad scope v/s limited knowledge:

Management accounting is a wide concept that is to be taken into consideration before

appointing an accountant. It requires skills and knowledge to look into the matters of
monetary and non-monetary transactions of the company. Lack of these skills can hamper
the overall report and data. Moreover, this data can be unreliable due to the inefficiencies
of the accountant.

9. Not an ideal choice for small-scale organizations:

Management accounting system is a very costly tool. As a result, it is not at all ideal for
small-scale industries or organization. Due to the high cost, it is not suitable for low budget
businesses. In addition, the utility of this system is restricted to large scale and complex
organizations.

10. Rate of adopting changes:

People say that old habits die-hard. Similarly, changes are hard to adapt. Thus, when
management accounting system is newly installed in an old setting organization, it depends
on the capabilities of the employee to adapt the sudden change. So installing management
accounting system cannot promise instant success.

11. Scope for improvement:

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New inventions have a lot of scope for improvement. Similarly, management accounting
system is a recent invention. Along with the advantages, it also has limitations. Due to its
complex nature, it requires a lot of intelligent interpretation. Therefore, it is safe to say that
the system still needs to evolve.

12. Impracticable in nature:

Management accounting system is a recent innovation. It works on the availability of old

records, present records, and the previously acquired results. Thus, it does not work while
facing problems apart from financial help. Therefore, it is impracticable in nature for the
overall performance of business organizations.

Management accounting system is indeed an improvised technique. It is a modern tool for

the development of the organization as a whole. The job description of the management
accountant is not limited to the financial sector; instead, it has a wider coverage over the
entire business. Although it benefits the company at some point but the employers cannot
neglect the cons of management accounting system either. Like all other inventions,
management accounting is also not flexible enough for all the organizations. However, the
complex corporate organizations can surely benefit from this system. This system looks into
several sectors within the company. Starting from the advice providing to various input in
business strategy. Therefore, it makes way for having an efficient control over various
business tasks by implementing management accounting system. Thus, management
accounting clearly plays a significant role in the overall development of the organization in
today’s competitive world.

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