Fundamentals of Management Accounting · Ch 1 — Introduction to Management Accounting
Management Accounting vs Financial Accounting
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Management Accounting vs Financial Accounting
Financial accounting and management accounting both use accounting data, but they serve different users and different purposes, and it is important to see clearly how they differ.
Financial accounting is the recording of business transactions and the preparation of the final accounts — the trading and profit & loss account and the balance sheet — to show the overall profit or loss and the financial position of the business to outsiders. Management accounting takes accounting data and reshapes it into information that helps the internal management to plan, decide and control.
| Basis of comparison | Financial Accounting | Management Accounting |
|---|---|---|
| Main objective | To ascertain the overall profit/loss and the financial position and report them | To provide information to management for planning, decision-making and control |
| Primary users | External parties — owners, investors, creditors, tax authorities | Internal management at various levels |
| Statutory requirement | Legally compulsory for most enterprises | Optional — maintained only if management finds it useful |
| Time focus | Mainly historical — records the past | Mainly future-oriented — planning and forecasting |
| Format | Follows a prescribed statutory format | No fixed format; designed to suit the purpose |
| Coverage | Records the whole business in aggregate | Selective — deals only with the matter or segment in hand |
| Type of information | Chiefly monetary (financial) information | Both monetary and non-monetary information |
| Precision | Aims at accuracy and exactness | Uses estimates and approximations where speed and relevance matter more |
| Period of reporting | Usually once a year (plus half-yearly/quarterly) | Reports whenever management needs — monthly, weekly, even daily |