Question

Management accounting and financial accounting provide different information for different purposes. Explain what this means and provide an example that illustrates the differences between management and financial accounting.

Answer 1

Accounting, refers to the process of recording, classifying and summarizing in monetary terms, the business transactions and events and interpreting the results. It is used by entities to keep a track of their financial transactions. Financial Accounting and Management accounting are the two branches of accounting. Financial accounting stresses on giving true and a fair view of the financial position of the company to various parties.

On the contrary, management accounting aims at providing both qualitative and quantitative information to the managers, so as to assist them in decision making and thus maximizing the profit. This article excerpt is created to help you learn the significant differences between financial accounting and management accounting.

BASIS FOR COMPARISON	FINANCIAL ACCOUNTING	MANAGEMENT ACCOUNTING
Meaning	Financial Accounting is an accounting system that focuses on the preparation of financial statement of an organization to provide the financial information to the interested parties.	The accounting system which provides relevant information to the managers to make policies, plans and strategies for running the business effectively is known as Management Accounting.
Is is compulsory?	Yes	No
Information	Monetary information only.	Monetary and non-monetary information
Objective	To provide financial information to outsiders.	To assist the management in planning and decision making process by providing detailed information on various matters.
Format	Specified	Not specified
Time Frame	Financial Statements are prepared at the end of the accounting period which is usually one year.	The reports are prepared as per the need and requirements of the organization.
User	Internal and external parties	Only internal management.
Reports	Summarized Reports about the financial position of the organization	Complete and Detailed reports regarding various information.
Publishing and auditing	Required to be published and audited by statutory auditors	Neither published nor audited by statutory auditors.

Management Accounting Example

For example, Raj is the CFO for a manufacturing company. Everyday, Raj deals with financial decisions that could make or break the company. As a result, he advises the business from the perspective of its profits, cash standing, and costs. Raj fills an important role in the business.

Raj must create a managerial accounting report for the business. Company controllers have asked for this in the process of a quarterly review. So, Raj must make a quality report so that the company can make educated decisions from it. He must attack management accounting from a strategic approach.

Raj has compiled the company financials into the report. This part was not difficult since there is a precedent on this that has been continued for decades. However, Raj must choose the important variables related to their new business operations. These relate to the two following fields: online commerce and a new, very large client.

Raj decides to keep the report more relevant to his duties as a CFO. Instead of including the analysis of the website and deals with the recently acquired big name client, he instead focuses on how these operations relate to company finances. He includes only this information as he finishes his report.

Financial Accounting are the accounts, which are prepared at the end of a fiscal year. It gives a precise idea of the financial position of the business/organization to the owners, management, or other interested parties. Financial statements are primarily recorded in a journal; then transferred to a ledger; and thereafter, the final account is prepared (as shown in the illustration).

Usually, a final account includes the following components −

Trading Account

Manufacturing Account

Profit and Loss Account

Balance Sheet