Financial accounting and management accounting are two very important terms in the world of finance. There are many differences in financial accounting and management accounting and all finance students should be aware of them to make their basics strong. So, the next section deals with the distinction between these two kinds of accounting.
Difference Between Financial Accounting and Management Accounting
Financial accounting is the collection, recording, classification and proper presentation of financial information or date in such a way that all external agencies such as income tax authorities, government, shareholders, creditors of a company can understand it easily. From the data presented by financial accounting, these external agencies can easily understand what exactly is going on in a company. They can know the financial strengths and weaknesses of a firm by the financial data presented through the process of financial accounting. Managerial accounting is related to the accounting work done for the better understanding of facts for the management of the company. Managerial accounting is not done for any outside party, but only for the company management to know where they should give more attention to post better financial results.
Another difference between these two types of accounting is that financial accounting is mandatory whereas managerial accounting is optional. Audited financial accounts are to be submitted to the tax authorities while managerial accounting work is referred only by the company management. Financial accounting is always done by certified accountants whereas management accounting work could be assigned to anyone in the company by the board of directors.
Another major distinction between the two is that financial accounting is done at the end of the financial year whereas managerial accounting data is presented to the management as and when it is required. While financial accounting consists of only monetary aspects of the business, managerial accounting consists of some suggestions for the management from the management accountants for improving the company performance. Accounting profit formula will help you know things better. Another point to note is that financial accounting does not provide profit details and cost details department wise or product wise but it provides it as a whole. However, managerial accounting can provide department and product wise cost and profit details. Many financial experts believe that more than financial accounting, managerial accounting helps the company management in strategic decision-making and planning future expansion plans.
We can certainly say that management accounting process is an added financial burden for organizations as it requires software, more manpower for timely presentation of useful data. However, due to growing competition and changed times, it has become a necessity. However, the recommendations of the management accountants may or may not be accepted by the board of directors depending on how effective they are. While fixed principles of accounting are followed in the financial accounting process, the principles might not be completely followed in the case of managerial accounting. Financial accounting is concerned more with what has already happened whereas management accounting deals with what will happen in the near future. Financial accounting, however, fails to deal with the behavior of costs which are imperative for cost control. The losses due to inefficiencies and wastage of goods and materials cannot be understood with the help of financial accounting.
From the above content, we conclude that both these types of accounting are a must to ensure the financial stability of a company. As a leader of a company, you should supervise over the accounting job and see to it that accounting ethics and high standards of professionalism are followed while preparing them.
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