Distinction Between Management Accounting and Financial Accounting

Distinction Between Management Accounting and Financial Accounting

The 12 principal differences between management and financial accounting are described here.

1. Necessity:

Financial accounting must be done. Enough effort must be expended to collect data in acceptable form and with an acceptable degree of accuracy to meet the requirements of the Financial Accounting Standards Board (FASB) and other outside parties, whether or not the management regards this information as useful. Management accounting, by contrast, is
entirely optional, no outside agencies specify what must be done or indeed that anything need be done. Because it is optional, there is no point in collect-ing a piece of ( management accounting information unless its value to management‘s believed to exceed the cost of collecting it.

2. Purpose:

The purpose of financial accounting is to produce financial statements for outside users. When the statements have been produced, this purpose has been accomplished. Management accounting in-formation, on the other hand, is only a- means to an end, the end being the planning, implementing, and controlling functions of management.

3. Users:

The users of financial accounting information (other than management itself) are essentially a ―faceless‖ group. The managements of most companies‘ do not personally know many of the shareholders, creditors, or others who use the information in the financial statements. Moreover, the information needs of most of these external users must be
presumed; most external users do not individually request the information they would like to receive. By contrast, the users of management accounting information are known managers plus the people who help these managers-analyze the information. Internal users information needs are relatively well known because the controller‘s office solicits these needs in designing or revising the management accounting system.

4. Underlying Structure:

Financial accounting is built around one fundamental equation: Assets= Liabilities + Owners‘ Equity. In manage-ment accounting, there are three types of accounting, each with its own set of principles.

5. Source of Principles:

Financial accounting information must be reported in accordance with generally accepted accounting principles (GAAP). Outside users need assurance that the financial statements are prepared in accordance with a mutually understood set of ground rules; otherwise, they cannot understand what the numbers mean. GAAP  provide these common ground rules.

6. Time Orientation:

Financial accounting records and reports the financial history of an organization. Entries are made in the accounts only after transactions have occurred. Although financial accounting information is used as a basis, for making future plans, the information itself is historical. Management accounting includes, in its formal structure, numbers that represent estimates and plans for the future as well as information about the past. The objective of financial accounting is to tell it like it was,‖ not like it will be.

7. Information Content:

The financial statements that are the end product of financial accounting include primarily monetary information. Management accounting reports deal with no monetary as well as monetary information. These reports show quantities of material as well as its monetary cost, number of employees and hours worked as well as labour costs, units of products sold as well as rupee amounts of revenue, and so on.

8. Information Precision:

Management needs information rapidly and is often willing to sacrifice some precision in order to gain speed in reporting. Thus, in management accounting approximations are often as useful as, or even more useful than, numbers that are more precise. Al-though financial accounting cannot be absolutely precise either, the approximations used in management accounting are broader than those in financial accounting.

9. Report Frequency:

Corporations issue detailed, financial statements only annually and less detailed interim reports quarterly by contrast, fairly detailed management accounting reports are issued monthly in most larger organizations; and reports on certain activities may be prepared weekly, daily, or in a few instances in real time.

10.Report Timeliness:

Because of the needs for precision and a review by outside auditors, plus the time requirements of typesetting, financial accounting reports are distributed several weeks after the close of the ending December 31 generally are not received by shareholders until March or April. By contrast, because management accounting reports may contain information on which management needs to take prompt action, these reports are usually issued within a few days of the end of a month.

11.Report Entity:

Financial statements describe the organization as a whole. Although companies that do business in several industries are required to report revenues and income for each industry, these are large segments of the whole enterprise. Management accounting, by contrast focuses, mainly on relatively small parts of the entity that is, on individual products, individual activities, or individual divisions, departments and other responsibility centers. As we shall see, the necessity for dividing the total costs of an organization among these individual parts creates important problems in management accounting that do not exist in financial accounting.

12.Liability Potential:

Although it happens infrequently, a company may be sued by its shareholders or creditors for allegedly reporting misleading financial information in its annual report. By contrast, as previously stated, management accounting reports need not be in accord with GAAP and are not public documents. Although a manager may be held liable for some inappropriate action and management accounting information conceivably may have played some role in has or her taking that action, it is the action itself, not the management accounting documents, that gives rise to the liability.