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Financial Accounting and Management Accounting

Difference Between Financial Accounting and Management Accounting

Difference Between Financial Accounting and Management Accounting

The main points of distinction are discussed below:

  1. Object:

    The main object of financial accounting is to measure business income and communication of information to the various categories of persons, such as, management, creditors, supplier’s of goods, bankers investors, etc. whereas, the main objectives of management accounting is to help the internal management in formulating policies and plans.

  2. Nature :

    Financial accounting is objective in nature. It lays emphasis on the past activities and represents historical records just to show the results of the business. On the other hand, management accounting is subjective in nature. It stresses the future and uses historical costs and data for estimating the future. Thus, management accounting has prospective character.

  3. Compulsion:

    The Indian Companies Act, 2013 has made financial accounting obligatory for joint stock companies to maintain a system of financial accounting. At the same time, the benefits as offered by a financial accounting system have made it more or less compulsory for the non-company organization. On the other hand, the setting up of management accounting system is at the discretion of the management.

  4. Subject Matter :

    Financial accounting considers the business as one entity and accordingly financial accounting reports have been confined to the business operations as a whole. Such statements present the position and the performance of the entire business. On the other hand, under management accounting system each unit/department is treated as a separate entity in order to ensure effective planning and control. Therefore, profitability and performance reports are prepared for each unit Or division of the business separately.

  5. Accounting Principles :

    Financial accounting system is based On some accounting principles and conventions which a financial Accountant has to strictly follow, while preparing financial accounts and Statements. On the other hand, management accounting is not bound by Generally accepted accounting principles and conventions. The preparation Of reports and statements under management accounting are governed by The requirements of the management. Management can frame its own. Ground rules and principles regarding form and content of information Required for internal use.

  6. Precision:

    Financial accounting pays more emphasis on Precision and considers only actual figures in the preparation of its Statements. There is no scope for approximate figures in financial Accounting. On the other hand, the reports and statements prepared under Management accounting system contain more approximate figures than The actual figures. Thus, management accounting is less precise as Compared to financial accounting.

  7. Frequency of reports:

    The financial statements are prepared at The end of financial period which is usually a period of twelve months. But The management accounting reports and statements are prepared at a regular Intervals so that management may not face any difficulty in decision-Making. Management is constantly informed about the business Performance through these reports and statements. Thus, the reporting Frequency of management accounting is much higher as compared to the Reporting of financial accounting.

  8. Nature of Data Used:

    The financial statements as prepared under Financial accounting contain only such transactions that are expressed in Monetary terms. The non-monetary events such as nature of competition, Business reputation, change in fashion, are not at all considered by financial Accounting. But management accounting uses both monetary and non-Monetary data.

  9. Recipients:

    Financial statements such a Profit and Loss account And balance sheet are extensively used by outsiders, i.e., shareholders Creditors, tax authorities etc. on the other hand, management accounting Reports and statements are exclusively meant for management. Such reports Are not easily available for outsiders.

  10. Methodology:

    Financial accounting records the transactions Relating to income, revenue, personal accounts and property accounts, Etc. whereas management accounting reports, cost and revenue by profit Centre or responsibility center.

  11. Period:

    Financial accounts are prepared for a particular period. Profit and Loss account is generally prepared for one year. All the items relating to that year are taken to Profit and Loss Account. Balance Sheet is Prepared on a particular date. It reveals the financial position of the concern On that date. Management accountant supplies information from time to Time during the whole year. There are no specific period for which Management accounts are prepared.

  12. Audit:

    Financial accounts can be got audited. Under Companies Act, 1956 auditing of financial accounts is compulsory. On the other hand. Management accounts can not be audited. They are not based on actual Figures and projected data are also used in management accounting. So it Is not possible to get management accounts audited.

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