Comparing
area & scope of management accounting with financial accounting:
Financial
accounting and management accounting are closely interrelated since management
accounting is to a large extent rearrangement of the data provided by financial
accounting. Moreover, all accounting is
financial in the sense that all accounting systems are in monetary terms and
management is responsible for the contents of the financial accounting
statements.
In
spite of such a close relationship between the two, there are certain
fundamental differences. These differences can be laid down as follows:
(i)
Objectives:
Financial accounting is designed to supply information in the form of
profit and loss account and balance sheet to external parties like
shareholders, creditors, banks, investors and Government. Information is supplied periodically and is
usually of such type in which management is not much interested. Management Accounting is designed principally
for providing accounting information for internal use of the management. Thus, financial accounting is primarily an
external reporting process while management accounting is primarily an internal
reporting process.
(ii)
Analysing performance:
Financial accounting portrays the position of business as a whole. The financial statements like income
statement and balance sheet report on overall performance or statues of the
business. On the other hand, management
accounting directs its attention to the various divisions, departments of the
business and reports about the profitability, performance, etc., of each of
them. Financial accounting deals with
the aggregates and, therefore, cannot reveal what part of the management action
is going wrong and why. Management
accounting provides detailed analytical data for these purposes.
(iii)
Data used:
Financial accounting is concerned with the monetary record of past
events. It is a post-mortem analysis of
past activity and, therefore, out the date for management action. Management accounting is accounting for
future and, therefore, it supplies data both for present and future duly
analysed in detail in the 'management language' so that it becomes a base for
management action.
iv)
Monetary measurement:
In financial accounting only such economic events find place, which can
be described in money. However, the
management is equally interested in non-monetary economic events, viz.,
technical innovations, personnel in the organization, changes in the value of
money, etc. These events affect
management's decision and, therefore, management accounting cannot afford to
ignore them.
For
example, change in the value of money may not find a place in financial
accounting on account of "going concern concept". But while affecting an insurance policy on an
asset or providing for replacement of an asset, the management will have to
take into account this factor.
(v)
Periodicity of reporting: The period of reporting is much longer in
financial accounting as compared to management accounting. The Income Statement and the Balance Sheet
are usually prepared yearly or in some cases half-yearly. Management requires information at frequent
intervals and, therefore, financial accounting fails to cater to the needs of
the management. In management accounting
there is more emphasis on furnishing information quickly and at comparatively
short intervals as per the requirements of the management.
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