Difference between Management Accounting and Financial Accounting

Difference between Management Accounting and Financial Accounting: Business is an economic activity undertaken with the motive of earning profits and maximizing wealth for the owners. Business cannot run in isolation. Largely, business activity is carried out by people coming together with a purpose to serve a common cause. Must Read What is Net Salary?

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Financial Accounting

It is commonly termed as Accounting. The American Institute of Certified Public Accountants defines Accounting as “an art of recording, classifying and summarizing in a significant manner and in terms of money, transactions, and events which are in part at least of a financial character, and interpreting the results thereof.”

The first step in the cycle of accounting is to identify transactions that will find a place in books of accounts. Transactions having financial impact only are to be recorded. E.g. if a businessman negotiates with the customer regarding the supply of products, this will not be recorded. The negotiation is a deal that will potentially create a transaction and will have an exchange of money or money’s worth. But unless this transaction is finally entered into, it will not be recorded in the books of accounts.

Secondly, the recording of business transactions is done based on the Golden Rules of accounting (which are explained later) systematically. Transactions of a similar nature are grouped and recorded accordingly. e.g. Sales Transactions, Purchase Transactions, Cash Transactions, etc. One has to interpret the transaction and then apply the relevant Golden Rule to make a correct entry thereof.

Thirdly, as the transactions increase in number, it will be difficult to understand the combined effect of the same by referring to individual records. Hence, the art of accounting also involves the step of summarizing them. With the aid of computers, this task is simplified in today’s accounting world. The summarization will help users of the business information to understand and interpret business results. You may also like How to Finalize Balance Sheet.

Lastly, the accounting process provides the users with statements that will describe what has happened to the business. Remember the two basic questions we talked about, one to know whether the business has made a profit or loss and the other to know the position of resources that are used by the business.

It can be noted that although accounting is often referred to as an art, it is a science also. This is because it is based on a universally applicable set of rules. However, it is not a pure science as there is a possibility of different interpretations.

Management Accounting

Management Accounting is concerned with the use of Financial and Cost Accounting information for managers within organizations, to provide them with the basis for making informed business decisions that would allow them to be better equipped in their management and control functions. Unlike Financial Accounting information (which, for public companies, is public information), Management Accounting information is used within an organization (typically for decision-making) and is usually confidential and its access available only to a selected few.

According to the Chartered Institute of Management Accountants (CIMA), Management Accounting is “the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management Accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory authorities, and tax authorities”.

Management Accounting aims to facilitate management in formulating strategies, planning and constructing business activities, making decisions, optimal use of resources, and safeguarding assets of business.

These branches of accounting have evolved over years of research and are synchronized with the requirements of business organizations and all entities associated with them. We will now see what are they and how accounting satisfies the various needs of different stakeholders. Must Check Objectives of Accounting.