How Management Accounting Differ from Financial Accounting

People have a belief that both the Management Accounting and Financial Accounting are the same. But it is not true at all. Management Accounting is a branch of accounting, evolved over many years. Now It is compatible with all the requirements of business organizations and their functions.

Management Accounting mainly uses in business organizations to help the management for an informed business decision making.

To provide information, Management accounting using both cost and financial accounting information for processing and the output will be available to top management for their decision making.

Information provided by Financial Accounting meant for the stakeholders of the business.

These stakeholders may include investors, the general public, creditors etc. But the information provided by Management Accounting is limited to top-level management only.

How can we define the Management Accounting ?.

Information provided by Financial Accounting meant for the stakeholders of the business.

These stakeholders may include investors, the general public, creditors etc. But the information provided by Management Accounting is limited to top-level management only.

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.

What are the main functions of Management Accounting?

Suppose we have a Management Accountant in a firm, what will be his main duties in the organization. He mainly performs the job of an analytical.

The person who is working as a Management Accountant needs to be a critical and analytical thinker. He needs to examine each operation, functions and products in deep and should also possess a strong capability of attention to details.

1. Analysis

A Management Accountant needs to do a lot of analysis based on the information provided by the Finacial Accounting. This information includes financial and non-financial information. The output of this analysis may help top-level management to take a decision.

There may be many objectives behind the analysis, usually, all these analyses are for the improvement of the organization by reducing the cost and increasing productivity

2. Management Information System

Establishing and maintaining management information system is another responsibility of Management Accounting. If the information is not adequate and proper, the findings and recommendations will not ensure a proper result.

The management accountants should implement a financial policy and management information system for the company. Management Accountants evaluates company performance using key data. 

3. Budgeting and Variance analysis

Budget is a forward-looking plan of estimated revenue and its utilization for the achievement of a specific objective for a period. 
Budgeting is the process of preparing the budget.

Management Accounting is responsible for the preparation and follows up of the budget vs actual performance. And to remind the top-level management the required corrective actions to overcome the deviations

4. Forecasting

Forecasting is the process of predicting the future by analyzing the past events, data and information. To do a clear forecast, Management Accountant needs to have a clear idea about the financial statement of the organization for the past and present.

Based on this information, Management Accountant can forecast the future. They have attained expertise in the use of statistical and mathematical techniques for the prediction of the future.

5. Strategic Planning

Strategic planning is the process of planning the organizational goals and the resources and activities required to achieve set goals.

The Management Accountants needed to take part in the strategic planning process of the organization.

6. Reporting

Ordinarily, financial Reporting is purely compliance-oriented reports.  The organization needs to follow some of the rules and regulations exists in the country of operation in case of financial reporting. 

But Management Accounting reports are free from legal compliance scope. It will present a deeper synopsis of the financial statement and also give a segment or department wise analysis.

Management Accountants will do the preparation and reporting these reports to top-level management.

7. Break-Even Analysis

Break-even analysis is the financial mechanism used to measure the quantity of product or service needed to sell to cover the cost connected with it. 

Management Accountant can find the level at which the no loss no profit can accomplish. These responsibilities arise when an organization plans to launch a new product or services. 

How to become a Management Accountant

There are many local and international institutes for the development and value addition to the profession of Management Accountants. 

They are Chartered Institute of Management Accountants (CIMA), Institute of Management Accountants (IMA), They are doing very well internationally. Institute of Cost and Management Accountants of India etc. is the institute for training and development of management accountants in India.

How can we define Financial Accounting

Financial Accounting is dealing with the preparation and reporting of financial information to internal and external users. Financial Accounting is the process by which the financial transactions are recording,  analysing, classifying and summarizing.

Financial Accounting also presents this information in a meaningful form for the true and fair view of the result of the business. Financial Accounting requires to follow a set of rules like GAAP,  IFRS or other regulations set by the local government where the business functions.

The American Institute of Certified Public Accountants (AICPA) defines accounting as:

the art of recording, classifying, and summarizing in a significant manner and in terms of money, transaction and events which are, in part at least of financial character, and interpreting the results thereof.

This technical definition tells us what accounting is.

What are the main functions of Financial Accounting?

The recording is the first step in the process of doing accounting. One of the main functions of financial accounting is the recording of all financial transactions in the books of accounts.

This process is carrying out based on the debit and credit rule of accounting. This primary function is called journalizing

2.Classifying and Summarizing

Classification in accounting means the grouping of similar items of accounts.  After this, all this information grouped into many meaningful reports.

3. Review Function

At present, virtually all organizations are using an ERP system. As a result of this ERP implementation, all the departments may record transactions and it ultimately hit the financial statement of the company.

Financial accountants are free from all those daily routine jobs and only required to review those transactions and records. Hence, they can ensure that those transactions are entered in the system as the policy of the management.

4.Verification of Records

Financial Accounting needs to verify all the accounting records and its accuracy as per the accounting standards and principles like IFRS, GAAP or the local rules and regulations.

5.Preparation of Statutory Books of Account

Financial Accountant’s ultimate responsibility is to prepare the final statement periodically and report it to the stakeholders. These stakeholders include internal users and external users of final accounts. 

Read More: Depreciation Accounting – Objectives and Methods

Main Difference Between Management Accounting and Financial Accounting

BaseFinancial AccountingManagement Accounting
IndependenceFinancial Accounting based on the economic affairs of the organizationManagement Accounting based on the data available from Financial Accounting
FunctionsThe essential functions of the Financial Accounting are recording and the classifying of the transactions in the books of accounts. It also includes the preparation of the financial statements of the organization.The essential functions of Management Accounting are the preparation of the sound data to serve the management in the process of planning, controlling and decision making.
Users of ReportsThe reports prepared by the Financial Accounting used by internal and external parties of the organization. Internal parties include management, employees and external parties include creditors, shareholders, government etc.All the reports prepared by the Management Accounting is as per the requirement of the management only. Hence the sole users of the Management Accounting report are the management.

This Post Has One Comment

  1. Jobi

    This article really helped me to know the practical difference between Management Accounting and financial Accounting

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