Today accounting is used as a tool in analysis of business and its activities. Accounting information is presented in different ways in order to help in analysis by the different users of the information.
The two widely used types of accounting are:
- Financial accounting
- Management accounting.
Financial accounting is the presentation of accounting information for stakeholders and regulators. It presents the financial position for an entire time period.
On the other hand, Management accounting is the presentation of analysis of business activities to the internal management to facilitate decision making.
Definition of Management accounting
The Institute of Cost and Management Accountants, London, has defined Management Accounting as: “The application of professional knowledge and skill in the preparation of accounting information in such a way as to assist management in the formulation of policies and in the planning and control of the operation of the undertakings.“Similarly, according to American Accounting Association: “It includes the methods and concepts necessary for effective planning for choosing among alternative business actions and for control through the evaluation and interpretation of performances.”
How is Management accounting different from Financial accounting?
Financial accounting and management accounting have some inherent differences. They are
| Basis for Comparison | Management accounting | Financial accounting |
| Purpose | It is used for internal purpose | It is used for external reporting primarily, although the management also reviews it |
| Regulation | It is not regulated by any law | It has to be presented as per standards |
| Users | Its users are the management of an organization | Its users are shareholders, investors and regulators |
| Objective | It aids in internal decision making | It aids in investment decision by outsiders and monitoring by regulators |
| Mandatory | Preparation and presentation of financial statements is not mandatory | Preparation and presentation is mandatory. |
| Audit | It is not subject to audit | Financial statements must be audited |
| Frequency | There is no defined frequency for preparation and presentation of the statements | Financial statements must be prepared for the financial year and presented |
| Contents | Management accounts include both monetary and non-monetary information | Financial accounts include only monetary information |
What are the benefits of Managerial accounting?
Management accounting is very beneficial and hence is being used widely now. The benefits are as follows:
- Planning
In management accounting, the financial information and non financial information is presented at regular intervals say weekly, fortnightly to the management. This presentation includes forecasts, budgets and in-depth analysis. Hence it assists the management in planning the business activities.
- Decision making
Since management accounting presents various charts, forecasts and analysis the management uses it for decision making.
- Identify early signs of problems
If a product is not performing well the management can identify it early on as the accounts are presented at regular intervals. This will aid in overcoming the constraints early on and avoiding future losses.
- Strategic management
Based on the information presented in management accounting, the management can take decisions about continuing a product or modifying the sale strategy. Since management accounting is not regulated by any law, the management can decide the areas that require more analysis, investigation and accordingly draw up strategies.
Functions of managerial accounting
Managerial accounting performs the following functions in general
- Profitability
Management accounting determines the profit from a particular product, project or line of business.
- Break even analysis
It determines the number of units at which the organization will attain a no profit no loss situation.
- Forecasting
It determines the bottlenecks in the organization and their impact on the organization.
- New product analysis
It prepares analysis for the new product in terms of standard costs, actual cost and reasons for deviations.
- Stock valuation
Determine the direct and indirect costs of stock in hand and presenting it to management
- Variance analysis
Performing trend analysis for various costs incurred and understanding the causes for the variances.
- Capital budgeting analysis
Understanding the need for acquiring fixed assets and the costs involved and allocation of finances to the best available option.
- Aids in Financial accounting
Management accounting presents financial information at regular intervals and hence it aids in the preparation of financial statements at year-end.
Just as automation has touched every aspect of business so also ERP systems enable reporting under management accounting. The various functions of management accounting like capital budgeting, variance analysis, profitability are performed by ERP systems and reports are generated. The management accountant has to ensure correctness of the information inputted and reports generated.
Management accounting provides the management with better control of the business. Although not regulated by any law it provides the management an assurance. It provides the management the confidence to face auditors and regulators. It aids in better management.
