Financial Accounting Compared with Management Accounting
Chapter Five
Syllabus topic 1, "Introduction to Management Accounting – Meaning, Nature, Scope, Functions, Decision Making Process, Financial Accounting V/s Management Accounting"
Pages 9 to 10 of 162
In one line
Financial accounting reports the whole enterprise's past to outsiders in a form the law prescribes; management accounting reports whatever a manager needs, in whatever form helps, and mostly about the future.
The ten points
| Basis | Financial accounting | Management accounting | |
|---|---|---|---|
| 1 | Users | External: shareholders, lenders, the Registrar, the tax authorities | Internal: the board, managers, supervisors |
| 2 | Object | To show a true and fair view of what happened | To assist a decision |
| 3 | Compulsion | Compulsory, under the Companies Act 2013 and other statutes | Optional; no law requires it |
| 4 | Form | Prescribed: Schedule III and the accounting standards | None; whatever form communicates |
| 5 | Period | The financial year, fixed by section 2(41) | Any period the decision needs, a day or a decade |
| 6 | Time frame | The past, recorded | Chiefly the future, estimated |
| 7 | Unit reported | The whole enterprise | A segment: a product, a branch, a shift |
| 8 | Precision | Exact, to the rupee, and audited | Approximate where approximation is enough; speed beats precision |
| 9 | Data used | Monetary only | Monetary and non-monetary: units, hours, staff numbers, market share |
| 10 | Audit and publication | Audited and published | Neither audited nor published |
Every row after the first is a consequence of the first. Say that in the opening line of the answer and the rest reads as an argument rather than a list.
The three points students misstate
"Management accounting is more accurate." It is not. Financial accounting is the accurate one, because it is audited and because it must be exact. Management accounting trades precision for speed and relevance: an estimate delivered on Monday beats an exact figure delivered in April.
"Management accounting does not use financial accounting." It uses almost nothing else. The whole of this paper reads published financial statements. The difference is what is done with them.
"Management accounting has no rules." It has no statutory rules. It has plenty of conventions, and a report that ignores them is simply a bad report.
Where the two meet
| Same source records | Both are built off the same ledgers and the same trial balance |
| Same measurement | Where management accounting uses a recorded figure, it uses the financial accounting figure |
| One feeds the other | Financial accounting produces the statements that Modules II, III and IV analyse |
So they are not rivals. Financial accounting is the record; management accounting is the use.
Cost accounting, which is the third member
A question sometimes asks for all three, and the third column is easy to misplace.
| Basis | Financial | Cost | Management |
|---|---|---|---|
| Object | True and fair view | Ascertaining cost and controlling it | Assisting a decision |
| Users | External | Internal | Internal |
| Compulsion | Compulsory | Compulsory for some classes of company, under cost records rules | Optional |
| Unit | The enterprise | The product, job or process | Any segment |
| Time frame | Past | Past and standard | Chiefly future |
Financial Accounting Compared with Management Accounting
Cost accounting sits between the two, and its output is one of management accounting's main inputs.
Quick revision
| The root difference | Who reads it: outsiders against insiders |
| The legal difference | Compulsory and prescribed against optional and unprescribed |
| The time difference | Recorded past against estimated future |
| The unit difference | The whole enterprise against a segment |
| What is shared | The same ledgers, the same measurement, and financial accounting's output as management accounting's input |
Test yourself
- From which single difference do all the others follow?
- Which of the two is the more accurate, and why?
- What fixes the period of a management accounting report?
- Is cost accounting compulsory?
- Name two kinds of data management accounting uses that financial accounting does not.
Answer in one sentence
1. The users: financial accounting reports to people outside the business and management accounting to people inside it.
2. Financial accounting, because it is exact to the rupee and audited, while management accounting trades precision for speed and relevance.
3. The decision being taken, not the statutory financial year.
4. For some classes of company it is, under the cost records and cost audit rules made under the Companies Act; for others it is not.
5. Physical units and labour hours, and staff numbers and market share are two more.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.