Differences between Management Accounting and Financial Accounting

It is quite often being said that the management accounting and financial accounting differs in a number of ways, the former being forward looking and the latter being backward looking having a post facto analysis. Though both of these have the common end objective of better future for the organization, however, management accounting is much broader than the financial accounting (Dichev, 2017). Management Accounting is meant only for the management in helping them make better decision whereas financial accounting is aimed towards providing information to the stakeholders and the investors to take economic decisions based on the past trends. Financial accounting is something which is a requirement of the law and specific formats and standards needs to be followed for the same whereas management accounting is not a necessity and may depend on the specific requirements of the organization (Choy, 2018).

The company Watley’s management team can use the management accounting techniques in order to aid their furniture company in taking the decisions regarding the future of company in many ways. Some of them include giving a forecast on the future cash inflows as well as the outflows as the company is suffering from cash flows shortage and it is necessary that the action for safeguarding the same and in order to increase the same must be taken at the right time  (Alexander, 2016). Furthermore, the company has also improved on the overall sales but there is a decrease in the profit considerably. Therefore, it is expected out of management accountants to give the ways in which the overall costs can be reduced, the main reason for the decrease in profit is increase in cost of sales and the overheads where the management accounting team is expected to give the trend of various heads of expenses and how the same can be reduced without the decrease in sales  (Jefferson, 2017).

They also need to highlight the inefficiencies, if any in the processes or execution patterns of the company. In case the break-up of the expenses is being seen, we can see that there has been a considerable increase in the salaries and wages head and therefore the ways needs to be suggested in order to control on the same  (Heminway, 2017). In terms of the balance sheet, we can see that there has been a considerable increase in the asset balances of inventory and trade receivable and thus the management accountant should reflect on whether the same is beneficial or not for the company. Management accounting is the base for producing the futuristic reports for the top management whereas the financial accounting is more or less based on the historical information and serves as base for giving the trend in the past. It is thus clear that the management accounting is generally looked as the forward looking function as it helps in prediction and estimation of future business scenario and helps the management in taking the correct measures and make strategies accordingly. Furthermore, management accounting is just not limited to numbers and is not only quantitative but also qualitative. With respect to the dependence, management accounting is dependent on financial accounting as it is based on a particular purpose or goal as in the given case whereas the financial accounting is not based on the management accounting. Thus, it is said that the management accounting processes help in the predictive risk analysis and take the appropriate measures in advance.

From the above discussion, it can be concluded that the management accounting is not limited to providing the financial and cost related information, rather it serves as the benchmark for evaluation of the actual performance as the forecast is already in hands.

References:

Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.

Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, p. 145.

Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), pp. 617-632.

Heminway, J., 2017. Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents. SSRN, pp. 1-35.

Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland. Technological Forecasting and Social Change, pp. 353-354.