Financial accounting and management accounting both appear to be similar in as much as both study the impact of business transactions and events of the enterprise and report and interpret the results thereof. Both provide information for internal as well as external use. But management accounting, although having its roots in financial accounting differs from the latter in the following respects
- Financial accounting deals with the business transactions and events for the enterprise as a whole. Management accounting, in addition to the study of events in relation to the enterprise as a whole takes organisation in its various units and segments and attempts to trace the impact and effect of the business transactions and events through its various divisions and sub-divisions. Thus, while the financial statement – profit and loss account, balance sheet and cash flow statements reveal the overall performance and position of the enterprise. Management accounting reports emphasize on the details of operational costs, inventories, products, process and jobs. It traces the effect and impact of the business transactions and events on costs, inventories, processes, jobs and products.
- Financial accounting is attached more with reporting the results and position of the business to persons and authorities other than management – Government, creditors, investors, owners, etc. At times, financial accounting follows window-dressing tactics in order to project a better than actual image of the enterprise. Management accounting is concerned more with generating information for the use of internal management and hence the information reflects the real or really expected position.
- Financial accounting is necessarily historical. It records and analyses business events long after they have taken place. Management accounting analyses the events as they take place and also anticipates such events for the future. Thus, it uses data which generally has relevance to the future.
- Since financial accounting data is historical in nature, it is more precise than the management accounting data, which generally reflects the expected future, and hence could only be estimation. This provides the necessary rapidity to management accounting information.
- The periodicity in reporting financial accounts is much wider than in case of management accounting. In financial accounting, generally, results are reported on year to year basis. In management accounting, weekly, fortnightly and even monthly reporting is used.
- Financial accounting has to be governed by the “generally accepted principles”. This is so because, it has to cater for the informational needs of the outsiders. It has to stick to the generally accepted methods of presentation of such information. Regarding the contents and form of information, financial accounting has to abide by the legal provisions also. Management accounting has not to worry about such legal and/or conventional constraints and the “generally accepted principles”. It is free to formulate its own rules, procedures and forms, because the information it generates is solely for internal consumption. In management accounting fixed assets may be stated at appraisal values, overhead costs may be omitted from inventories or revenues may be recorded before realization. Generally accepted principles of financial accounting do not permit such accounts. What is important in management accounting is the usefulness of the information for managerial functions rather than its general acceptability. The form and content of management accounting information differs according to the needs and purpose.
- Financial accounting is a must in case of joint stock companies to meet the statutory provisions of company law and tax laws. Even in case of sole proprietorship and partnership firms financial accounting becomes a necessity for tax purposes. Management accounting, on the other hand, is entirely optional and its forms and contents depend upon the outlook of the management.
- Financial statements prepared under financial accounting consist of monetary information only. Management accounting statements in addition to monetary information also consist non-monetary information, viz., quantities of materials consumed, and number of workers, quantities produced and sold and so on.
- Financial statements are required to be published and audited by statutory auditors. Management accounting statements are for internal use and thus neither published nor audited