Financial Accounting vs Management Accounting: Know the Difference

Finance is a key aspect of the business world. Financial and management accounting are essential for the successful running of a company. These assist the business in making strategic decisions based on their financial performance. Understanding these two types of accounting can help an organisation’s smooth functioning.

This blog will cover financial accounting vs. management accounting, the difference between cost accounting and management accounting and more. Read on to learn how applying both can help grow your business successfully.

Financial Accounting: A Short Definition

An accounting system involving the financial transactions of a business, it assists in analysing, recording and classifying transactions. Financial accounting is essential in preparing the financial statements of the company. External stakeholders analyse these statements to make investment decisions.

Financial accounting uses a company’s past financial performance record to assess its present financial health. A company has to follow GAAP and Schedule III of the Companies Act 2013 to make financial statements. The statements include the income sheet, cash flow statement and the company’s balance sheet.

The strict guidelines and rules governing financial accounting statements ensure transparency between the company and the stakeholders. An independent auditor verifies the accuracy of the financial statements. 

Purpose of Financial Accounting

Among the various functions of financial accounting, some are listed below:

1. Analysing transactions

Analysing each company transaction as soon as it occurs is essential. A team assesses the company’s financial activity and records the authentic transactions. They can assess the loss or profit of the company, use the data in trial balance form and finally prepare a balance sheet. All stakeholders must keep track of the required data to manage their investments.

2. Communicating transactions

The company’s stakeholders, like investors, lenders, creditors and banks, have the right to see the financial statements and reports of the same during the end of a fiscal year. The transactions must be communicated adequately to ensure people know their implications.

3. Meeting legal needs

While preparing the financial statements, the company has to comply with legal guidelines. They must adhere to GAAP (Generally Accepted Accounting Principles) and IND AS (Indian Accounting Standards). The company’s team responsible for preparing the financial statements should be aware of the laws and must meet the accounting rules and regulations while creating the financial statements.

4. Sequential recording of transactions

In large firms and major companies, a huge chunk of transactions occurs daily. It is difficult to keep track of each transaction. Financial accounting is advantageous in such circumstances. It provides a systematic way to record each transaction with the help of ledgers, journals and other accounting books.

Management Accounting: A Short Definition

Most people fail to distinguish between management accounting and financial accounting. This is why understanding management accounting, also known as managerial accounting, is imperative. Management accounting assists in analysing, collecting and understanding cost information.

Managers use management accounting data to plan and control future operations. Management accounting focuses on internal operations and assists with organisational decision-making. The managers can use the data to make financial decisions to achieve the company’s vision for the future. Management accounting provides both quantitative and qualitative information to managers.

Reports generated using financial data include cost analysis, budget forecasts and variance analysis depending on the requirements of managers and specific departments. There are no fixed guidelines or regulations regarding generating reports in management accounting. There is more flexibility in reporting financial data compared to financial accounting. 

Key objectives of management accounting focus on market forecasting and emerging developments. Company leaders often need to make quick operational decisions. Management accounting comes in handy during such times.

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Management Accounting Functions

Management accounting entails a range of functions, some of which we have discussed in the following section.

1. Organising

Management accountants strive to organise an organisation’s accounting tasks using modern techniques. They analyse distinct activities and help the managers administer the company’s human and non-human assets. Managers must be aware of the best ways to utilise human capital. Management accounting focuses on identifying and developing the skills for making employers productive. It teaches managers to develop a positive work environment. This branch of accounting even helps in managing change.

2. Controlling reports

Another function of management accounting is to check that the company’s goals are met. Monitoring, measuring and correcting reports’ outcomes can show a company’s actual performance compared to expected performance. Management accountants can use these reports to take appropriate action to keep the operations under their control. They can focus on what is missing if they find any discrepancies between actual and budgeted outcomes.

3. Forecasting

Forecasting is one of the key functions of management accounting. By presenting reports and data, forecasting can help business executives to estimate the impacts of various actions. Managers use capital budgeting, statistics principles and marginal costing to plan for the company. Management accounting can help companies predict their position in the continuously changing social, economic and political business climate.

4. Coordinating tools

Management accounting uses several coordinating tools to maximise the company’s revenue. These tools include financial analysis, budgeting, financial reporting, and interpretation. The tools help the management in various ways, such as preparing budgets, analysing costs, and developing standard costs.

5. Communicating

Management accountants develop various reports as part of their work. They must communicate their findings efficiently to managers and have some distinct control over their tasks. They assist the management in coming up with smart decisions. As a result, external parties learn about the business’ performance from the findings.

6. Analysing finance

Management accountant helps in financial analysis. They analyse financial data such as cash flow statements, balance sheets and profit/loss statements to find out the financial status of a company as well as its operating performance. Analysing the financial data of a company can help in predicting its future outcome along with its effectiveness.

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Difference Between Financial and Management Accounting

Now that you know the basics of financial accounting and management accounting, let’s learn about the differences between the two through the given table:

Cost Accounting and Management Accounting Difference

Before moving on to the difference between cost accounting and management accounting, let us learn about cost accounting. It is a business practice that involves collecting, classifying, and analysing cost information. The information helps the managers in their decision-making process.

The key objective of cost accounting is to fix the cost of business and keep track of the production cost. The information can help reduce various costs. Although financial accounting has some similarities, there is no need to report the information at the end of a fiscal year. Now, let us distinguish between cost accounting and management accounting.

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How Are Managerial Accounting and Financial Accounting Similar?

Apart from financial accounting and management accounting differences, it is also essential to know about their similarities. Here are some of the similarities:

1. These accounting types co-exist to provide accounting information to internal management and stakeholders.
2. Both are useful for preparing a company’s financial statements.
3. You need basic expertise and education in accounting concepts for both accounting types.
4. Both collect accounting data for preparing financial statements.
5. Users can find the cost of various accounting departments and periods from both accounting types.

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Conclusion

Most companies use both management accounting and financial accounting. These accounting types depend on financial transactions; hence, a proper financial system is necessary for the smooth running of a business. To push forward a career in accounting, you can take courses to equip you with the latest accounting systems.

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