Q. Distinguish between financial accounting and management accounting.
Financial Accounting vs. Management Accounting
Business is a diverse field and involves knowledge in various subjects. In business, one must know about finance, economics, marketing, and accounting, among other things. Accounting is the most challenging among them because it involves recording, summarizing, analyzing, verifying and reporting the results of business and financial transactions.
Accounting also has various fields; two of the most commonly used are Financial Accounting and Management Accounting. Listed below are their features.
Financial accounting is concerned with the preparation of financial statements for the use of the stockholders, suppliers, banks, employees, government agencies and the owners of the business enterprise.
It is intended to aid in the reduction of problems that may arise in the day to day transactions of the business. It publishes an annual report that summarizes an organization’s financial data that are taken from their records.
It is governed by local and international accounting standards. Its main purpose is to produce financial statements, provide information that can be used in the decision making and planning and to help an organization meet regulatory requirements. It is a legal requirement of all publicly traded organization.
Management accounting is concerned in providing basis for decision making and use of information by managers within an organization. It helps identify, measure, accumulate, analyze and interpret information to be used in planning, evaluation and control to ensure the proper use of an organization’s resources.
It also provides financial reports to shareholders, creditors, regulatory agencies and tax agencies. Management accounting involves sales forecasting reports, budget and comparative analysis, feasibility studies and merger or consolidation reports.
It is intended to provide information that is more a forecast than a background, to managers within the organization, is confidential and is computed by using information systems rather than general financial accounting standards. It is used in strategic, performance and risk management.
Management accounting has the following concepts:
- Cost accounting which is a central element is managerial accounting.
- Grenzplankostenrechnung (GPK) which a German costing method that provides ways on how to calculate costs that are assigned to a product or service.
- Lean accounting which is accounting for lean enterprise.
- Resource consumption accounting (RCA) which provides managers with information to support an organization’s optimization.
- Throughput accounting which recognizes modern production processes’ need for each other.
- Transfer pricing which is used in manufacturing and banking.
- Financial accounting is legally required from an organization, while management accounting is not.
- Financial accounting must be reviewed by a separate accounting firm, while management accounting is not required of this.
- Financial accounting is concerned about how the financial resources of the organization will affect its performance, while management accounting is concerned in how the reports will affect the behavior and performance of its employees.
- Financial accounting is governed by both local and international accounting standards, while management accounting is not.
- Financial accounting is historical in nature, that is, the reports are based on an organization’s previous performance and dealings, while management accounting is a forecast.