How does management accounting differs from financial
accounting? Explain briefly, how management accounting helps
the management of a company in making its decisions.
Financial
or traditional accounting consists of the classification,
recording, and analysis of the transactions of a business
in a subjective manner according to the nature of expenditure
so as to enable the presentation at periodic intervals, of
statements of profit or loss of the business and, on a specified
date, of its financial state of affairs. The day-to-day transactions
journalized or recorded in subsidiary books are posted in
the various ledgers and at the end of the accounting period,
a Profit and Loss Account and a Balance Sheet are prepared.
The emphasis is on the ascertainment and exhibition of the
profits earned or losses incurred by the business rather than
on the aspects of planning and control and decision making.
Management accounting includes all those accounting services
by means of which assistance is rendered to the management
at all levels, in formulation of policy fixation of plans
and control of their execution, and measurement of performance.
Management accounting is primarily concerned with the supply
of information which is useful to the management in decision
making for the efficient running of the business and thus,
in maximizing profit. Management account employs various techniques,
which include standard costing, budgetary control, marginal
costing, break-even and cost-volume-profit analysis, uniform
costing and inter-firm comparison, ratio accounting, internal
audit, and capital project assessment and control.
Difference between Management and Financial
Accounting
- Financial accounting depicts the past position of the
concern, while management accounting stresses at future.
- Financial accounting keeps a record of very large number
of daily business transactions and prepares various financial
statements according to accounting principles and standards.
In management accounting there is no such compulsion. It
lays emphasis on analysis and standards.
- Management accounting provides data to managers to help
them in making decisions about the future. To the contrary,
financial accounting aims at meeting the requirements of
outside parties who have financial stake in the business.
- Financial accounting is mandatory for all joint stock
companies and business organizations but this is not the
case with management accounting.
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