Management accounting is the updated version of what you call financial accounting and the most circulated term in corporate business arena. Management involves planning, organising, staffing, leading and controlling the resources available in an organisation, namely the physical and human resources. Much importance is given to personnel management as they are the priceless assets of any organisation.But it is equally important for a firm to record all its business transactions for future reference and tax audits. Thus the necessity of accounting comes into the fray.
Well, accounting means something to do with finance. So, what is the big difference, if it is financial or management accounting. One difference is in the title, and the other in their function. The rationale behind financial accounting is statutory, done for the benefit of shareholders, customers, government regulatory agencies, other external agencies, potential investors and the like. It records all business transactions that are purely monetary in nature and no further analysis is done.
Management accounting is voluntary and reports are prepared to meet the internal needs of management. We talked about planning, for which interpretation and analysis of such quantitative data and other inputs becomes necessary to plan for future needs of management. The main functions being, attention direction and problem solving, management accounting is primarily concerned with providing information relating to the various aspects of a business, like cost or profit associated with some portions of business operations. It employs techniques such as standard costing,budgeting,marginal costing, break- even analysis and so on., Inputs also stem from industry data, competitor data, published reports by public and private agencies and research studies findings, thus widening its scope for improvement in business operations.
Financial accounting is restricted to deal only with “generally accepted accounting principles” and any deviation is considered to be errors for correction. Although this leads to credibility and validity, what about timeliness of information? It is more important than the accuracy of information presented with a time delay for management’s perusal and it does not solve the purpose. The former restricts the accountant to a mere book-keeper while the latter transcends the role of the accountant to that of total business information technologist. Here he becomes an evaluator of different functional areas like marketing, production, purchase and personnel.
As modern business is huge in size, complex,diversified and decentralized in terms of operations, financial accounting just does not fill the bill, as information is required as when an event happens at various hierarchical levels of an organisation.Management accounting is inter disciplinary in character and derives inspiration from organizational theory,economics,behavioral sciences, statistics and management. Although the paraphernalia required for management reporting is complex and expensive, it is worth the try, as it tries to compare and contrast the actuals with the standards and bring out variances if any. This is quite useful in determining the cost-effectiveness of a particular project or to be prepared for suitable action.
Management accounting is nothing but a management information system where the managers have to be techno-savvy in order to handle the total information resource and project it suitably to the management to take timely actions for the increase in growth, profit and sustainability of the firm.