Accounting is a versatile profession and is continually changing and adapting to various requirements needed in different industries over the years. There are different branches of accounting namely financial management, cost, government, forensic and many others can be named according to the needs of the organization. So, there arises a necessity to know the difference between various types of accounting.
In this article, you will understand the difference between financial accounting, cost accounting and management accounting. Before going into the study of differences among them, let us define first what is financial accounting? Financial accounting defined as the representation of the company or firm’s activities done during the period and its financial position at the end of the accounting period. It deals with the preparation and presentation of financial statements namely Balance Sheet, Profit and Loss Account, Cash Flow Statement and Statement of Changes in Equity.
Understanding financial accounting basics is important to prepare and interpret financial statements. One of the basic financial accounting equation is “Assets is equal to Owner’s Capital (Equity) plus Liabilities”. Assets are the company’s property that helps in running the business smoothly and earn from its operations. While liabilities are the money which the company owes to creditors, banks etc. Normally too much liability is not considered good for the company. The reason is in case of liquidation or termination of company the creditors have to be paid first and if there is any residue, the owners or shareholders can take home. Capital is the contribution made the owner or the assets owned in setting up the business and bring it to life.
Financial Accounting vs. Cost Accounting vs. Management Accounting
Financial Accounting gives out information about the enterprise’s financial activities and situation. It makes use of the past or historical data. All the transactions and statements are recorded and presented in terms of money mostly. Persons who make use of these financial statements are outsiders like banks, shareholders, creditors, government authorities etc. Financial statements are usually presented once in a year and there is a certain format for their presentation. It is mandatory for the companies to follow the rules and policies framed under GAAP (Generally Accepted Accounting Principles). It indicates whether the company is running in loss or profit.
Cost Accounting helps in the determination of the cost of the product, how to control it and in making decisions. It makes use of both past and present data for ascertainment of product cost. There is no specific format for the preparation of cost accounting statements. It is used by the internal management of the company and usually the cost accountant prepares this to ascertain the cost of a particular product taking into account the cost of materials, labor and different overheads. No certain periodicity is needed for the preparation of these statements and they are needed as and when required by the management. This makes use of certain rules and regulations while computing the cost of different products in different industries.
Unlike the above two accounting, Management Accounting deals with both quantitative and qualitative aspects. This involves the preparation of budgets, forecasts to make viable and valuable future decisions by the management. Many decisions are taken based on the projected figures of the future. There is no question of rules and regulations to be followed while preparing these statements but the management can set their own principles. Like cost accounting, in management accounting also there is no specific time span for its statement and report preparation. It makes use of both cost and financial statements as well to analyze the data.
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