QS Study

Relations between Management Accounting and Financial Accounting

Management accounting is a field of accounting that analysis and provides cost information to the internal management for the purpose of planning, organizing, directing, controlling, and decision making. The main objective of financial accounting is to measure business income and communication of business information to the various categories of persons like management, creditors, suppliers, bankers, investors etc.

The relations between management accounting and financial accounting are as follows –

Management accounting

  • Primary user: Organization managers at various levels.
  • Freedom of choice: No constraints other than costs in relation to the benefits of improved management decisions.
  • Behavioral implications: Concern about how measurements and reports will influence managers daily behavior.
  • Time focus: Future orientation- formal use of budgets as well as historical records. Example, 19 x 9 budgets versus 19 x 9 actual performances.
  • Time span: Flexibility, varying from hourly to 10 to 15 years.
  • Reports: Details reports – concern about details parts of the entity, products, departments, territories etc.
  • Delineation of activities: Fields is less sharply defined. However, use sciences and behavioral sciences.

Financial accounting

  • Primary user: Outside parties such as investors and government agencies but also organization managers.
  • Freedom of choice: Constrained by generally accounting principles (GAAP).
  • Behavioral implications: Concern about how to measure and communicate economic phenomena. Behavioral considerations are secondary, although executive compensation based on reported results may have behavioral impacts.
  • Time focus: Past orientation – Historical evaluation. Example, 19 x 9 actual performances versus 19 x 8 actual performances.
  • Time span: Less flexible, usually 1.year or 1 quarter.
  • Reports: Summary reports – concern primarily with an entity as a whole.
  • Delineation of activities: Field is more sharply defined. Lighter use of related disciplines.