Financial Accounting vs Management Accounting

What is Management Accounting?

Management accounting is concerned with generating necessary information for decision making purposes in the organization and these data are not available for the general public or stakeholders. These data are used by the management of the company to make strategic decisions about the company and the preparation of these accounts may vary from organization to organization as there are no hard and fast rules as to what to report and how to report.

What is Financial Accounting?

Financial accounting is concerned with providing financial information about the company’s performance. Basically the financial information system provides financial information about the performance and the financial position of the company. The data related to financial accounting system is generated from past and present transactions of the company. The financial reporting system provides information to the stakeholders such as shareholders, employees, government, suppliers, customers and pressure groups. The principal purpose of financial reporting is to report about the stewardship function of the board of directors which is established through the principal agent relationship of shareholders and board of directors.

Financial Accouting Vs Management Accounting.

Financial accounting is concerned with recording the transactions that occurred during a period to provide information about the performance and financial position of an organization. Management accounting records are prepared for the use of internal managers where as financial accounting records are prepared for the use of external parties such as shareholders, government, customers, suppliers and general public. Management accounting records are considered to be confidential information of an organization where as financial accounting records are publicly available for some extent. Management accounting records are prepared using forecast information where as financial accounting records the transactions which were occurred during a particular period using data related to past. Preparation of financial accounts is highly regulated by accounting bodies using accounting standards. In contrast, preparation of management accounting records differs from organization to organization depending on their information needs. Financial Accounting.

• No privacy of data-

Financial accounting data (at least a summarized version) of a firm is available to any person who has an interest in knowing about those. But cost accounting data are kept confidential and accessed only by the management of the firm.

• Highly regulated-

The preparations of financial accounts are highly regulated by international and national standards. In Sri Lanka the preparation of financial accounts are governed by the Sri Lanka Accounting Standards where as in some countries such as UK it is governed by International Financial Reporting Standards (IFRS).

• Concerned with past data-

The financial accounting reports the information which is connected to past and there is no forecasting involved. But to make decisions into the future managers need data relevant to the future which is generated through the cost accounting system.

• Not flexible for user requirement-

Financial accounting system records information by adhering to accounting standards and the process is rigid. All the users are provided with same information to make decision without considering the requirement of the user. But cost accounting system is flexible enough to generate information based on the user (management) requirement.

• Specification as to when to produce-

Financial reports are bound to be produced once a week/quarter/year. But for cost accounting system it is not specified as to when to produce reports instead they produce reports whenever requested by the management.

• Mandatory requirement for reporting-

Companies are bound to prepare and submit their financial account to the company’s registrar and other regulating bodies such as stock exchange regulators in case of a listed entity. But cost accounting systems is not bound by any law or regulation and it is not a mandatory requirement to prepare cost accounting.

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