Difference between Financial and Management Accounting

This article discusses the difference between financial accounting and management accounting, including their meaning, reporting, format, aim, auditing, accuracy, time period, and outputs.

ACCOUNTING

Abstract
The report will present a detailed analysis of the business transaction by preparing the
financial statements and will throw a purview regarding the contrast in between the financial and
management accounting. It will also include computation of products cost and net profits by
applying the marginal and absorption costing method.

TABLE OF CONTENTS
Abstract ...........................................................................................................................................2
INTRODUCTION...........................................................................................................................1
Section A1........................................................................................................................................1
1. Preparing journal entries for the month of April ....................................................................1
Posting the entries into the ledger accounts ...............................................................................2
2. Trial balance as of 30th April .................................................................................................6
4. Framing income statement and balance sheet for the April month ........................................6
Section A2........................................................................................................................................7
Discussing difference between MA and FA ..............................................................................7
Explaining features of the high quality Financial information to both the company's
management................................................................................................................................9
Stating one statement that describes the final reports...............................................................11
SECTION B...................................................................................................................................11
Total Cost per unit under traditional costing system................................................................11
Under or Over absorption for Product B and Product C...........................................................12
Profits under Marginal and Absorption costing........................................................................12
Difference between absorption and marginal costing ..............................................................15
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Accounting refers to the practice of entering or recording the financial transactions that
are pertaining to the business. It is the process that involves interpreting, assessing and reporting
the business transactions to the oversight agencies, tax collection enterprises and the regulators.
The present report focuses on Jennifer Ltd and See-it-now Ltd, operates its business as a travel
agency and started its business from the month of April. Furthermore, the report throw a deeper
insights towards framing final reports through analysing the business transactions. Moreover, it
also includes high quality financial principles that the firm needs to follow for making reliable
reporting.
Section A1
1. Preparing journal entries for the month of April
Journal entries
Date Particulars Debit Credit
1st April Cash a/c Dr. 20000
Computer Equipment
a/c Dr. 40000
To capital a/c 60000
Depreciation A/c Dr. 600
To computer
Equipment 600
2nd April Rent expense A/c Dr. 1700
To cash A/c 1700
3rd April Office supplies A/c Dr. 1100
To cash A/c 1100
Office supplies
expense A/c Dr 400
To Office supplies 400
10th April Prepaid insurance 3600
To cash 3600
Insurance A/c Dr. 200
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To prepaid Insurance 200
24th April Cash a/c Dr. 7900
Accrued commission
A/c Dr. 1650
To commission
received 9550
28th April
Salaries expense A/c
Dr. 2120
To cash A/c 1800
To outstanding salary 320
29th April Repair expense 250
To cash 250
30th April
Telephone bill expense
A/c Dr. 650
To cash 650
30th April Drawing A/c Dr. 1500
To cash A/c 1500
81670 81670
Posting the entries into the ledger accounts
Ledger
Accounts
Dr. Cash a/c Cr.
Date Particulars Amount Date Particulars Amount
1st April To capital 20000 2nd April
By rent
expense 1700
24th April
To commission
received 7900 3rd April
By office
supplies 1100
10th April
By prepaid
insurance 3600
28th April By salaries 1800
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29th April
By repair
expense 250
30th April
By telephone
bill expense 650
30th April By Drawings 1500
30th April By balance c/d 17300
27900 27900
Dr.
Computer
equipment
A/c Cr.
Date Particulars Amount Date Particulars Amount
1st April To capital 40000 30th April
By
depreciation 600
30th April By balance c/d 39400
40000 40000
Dr. Capital A/c Cr.
Date Particulars Amount Date Particulars Amount
30th April To balance c/d 60000 1st April By cash A/c 20000
By computer
equipment 40000
60000 60000
Dr.
Depreciation
A/c Cr.
Date Particulars Amount Date Particulars Amount
30th April To computer 600 30th April By balance c/d 600
3

Equipment
600 600
Dr.
Rent expense
A/c Cr.
Date Particulars Amount Date Particulars Amount
2nd April To cash 1700 30th April By balance c/d 1700
1700 1700
Dr.
Office
supplies A/c Cr.
Date Particulars Amount Date Particulars Amount
3rd April To cash 1100
By office
supplies
expense 400
30th April By balance c/d 700
1100 1100
Dr.
Office
supplies
expense A/c Cr.
Date Particulars Amount Date Particulars Amount
To Office
supplies 400 30th April By balance c/d 400
400 400
Dr.
Prepaid
Insurance A/c Cr.
4

Date Particulars Amount Date Particulars Amount
10th April To cash 3600 By insurance 200
30th April By balance c/d 3400
3600 3600
Dr. Insurance A/c Cr.
Date Particulars Amount Date Particulars Amount
To prepaid
Insurance 200 30th April By balance c/d 200
200 200
Dr.
Accrued
Commission
A/c Cr.
Date Particulars Amount Date Particulars Amount
24th April
To commission
received 1650 30th April By balance c/d 1650
1650 1650
Dr.
Commission
received A/c Cr.
Date Particulars Amount Date Particulars Amount
30th April To balance c/d 9550 24th April By cash 7900
By accrued
commission 1650
9550 9550
5

Dr.
Salaries
Expense A/c Cr.
Date Particulars Amount Date Particulars Amount
28th April To cash 1800 30th April By balance c/d 2120
To outstanding
salary 320
2120 2120
Dr.
Outstanding
salary A/c Cr.
Date Particulars Amount Date Particulars Amount
30th April To balance c/d 320
By salaries
expense 320
320 320
Dr.
Repair
expense A/c Cr.
Date Particulars Amount Date Particulars Amount
29th April To cash 250 30th April By balance c/d 250
250 250
Dr.
Telephone bill
expense A/c Cr.
Date Particulars Amount Date Particulars Amount
30th April To cash 650 30th April By balance c/d 650
650 650
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Dr. Drawings A/c Cr.
Date Particulars Amount Date Particulars Amount
30th April To cash 1500 30th April By balance c/d 1500
1500 1500
2. Trial balance as of 30th April
Trial balance
Particulars Debit Credit
Cash 17300
Capital 60000
Computer equipment 39400
Depreciation 600
Rent 1700
Office supplies 700
Office supplies expense 400
Prepaid insurance 3400
Insurance 200
Accrued commission 1650
Commission received 9550
Salaries expense 2120
Outstanding salary 320
Repair expense 250
Telephone bill 650
Drawings 1500
Total 69870 69870
4. Framing income statement and balance sheet for the April month
Income statement
Particulars Amount Total
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Other income :
Commission received 9550
Expenses :
Depreciation 600
Rent 1700
Office supplies expense 400
Insurance 200
Salaries expense 2120
Repair expense 250
Telephone bill 650 5920
Net profit 3630
Balance sheet
Particulars Amount Total
Equities and liabilities :
Capital 60000
add: profits 3630
Less : Drawings 1500 62130
Current liabilities:
Outstanding salary 320 320
Total liabilities 62450
Fixed assets :
Computer equipment 39400 39400
Office supplies 700 700
Total non-current assets 40100
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Current assets :
Cash 17300
Prepaid insurance 3400
Accrued commission 1650
Total current assets 22350
Total assets 62450
Section A2
Discussing difference between MA and FA
Basis Financial Accounting Management accounting
Meaning FA refers to an accounting
system that emphasizes on
framing of final reports of an
enterprise in order to
communicate the financial
information to the interested
users.
On the other hand it refers to
the branch of accounting that
facilitates reliable and relevant
information to managers for
making plans, strategies and
policies for smooth
functioning of the business
operations.
Reporting Under financial accounting,
reporting is been made for the
public review, all the amounts,
figures and the facts are tended
to be disclosed publicly.
Under MA, reporting is made
for internal purpose. The facts
and the figures are seen as
confidential within the
management teams and the
other individuals in order to
make decisions.
Format In FA, manager needs to
follow the universal reporting
accounting standards that
includes GAAP or IFRS.
In MA there does not exist set
patterns or the format for the
reporting (Difference between
financial and management
9

accounting, 2017). The figures
are been reported in
accordance to target audience
and thus needs not to follow
any legal standards as like
IFRS and GAAP.
Aim Financial accounting tends to
aim only at the financial data
of the company.
However, MA aims at
including both non-financial as
well as the financial data in the
reports in accordance to the
requirement.
Auditing Under this, the reports are
been first audited and
thereafter reported or
published.
Under MA, there is no any
formal structure for auditing
needed for such type of the
reporting.
Accuracy The figures and the facts are
been supposed to seen as
accurate as the information is
counted as sensitive.
In MA, the figures are been
used on the basis of estimates
that are been used for the
purpose of future planning,
forecasting and the budgeting.
Time period In this, the reporting is been
made at period end of the
accounting year.
On the the other side, in this
the reporting is been done on a
frequent basis that the year
since an information is been
used for the betterment of the
decision making made for the
future plans.
Outputs It is the report that comprises
of the income statement, cash
flow statement and the balance
Such type of reports are
weekly, yearly and monthly
analyses of the products,
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sheet. functions and the geographies.
Reports Under this summarized reports
are been presented in order to
state the financial stake of an
enterprise.
It includes detailed and the
complete reports in relation to
several information.
Explaining features of the high quality Financial information to both the company's management
The major characteristics that reflects for a high quality finance related information are
as follows-
Relevance- It is the trait that directly relates with concept of the useful information which
implies to Jennifer Ltd and See-it-now Ltd in looking towards all the items of an information that
must be reported. This in turn might aid its users in making appropriate predictions and suitable
decision making.
Reliability- This quality is described as the primary one for Jennifer and See-It-Now Ltd
which makes an accounting information more and more useful for making decisions (Couillault,
Mizuguchi and Reed, 2017). Reliable information needs to form the judgements regarding the
financial position and earning potential of the business enterprise. It is been differ from one item
to the another item which are presented in the annual report that might be more reliable than the
others.
Understandability- It is indicated as the information quality which enables the users in
perceiving its importance. The information becomes meaningful when it seems to be more and
more understandable and thus useful to large number of the users. Presenting an information that
could only be understood by the sophisticated users and not by the others created as bias that is
inconsistent with adequate disclosure standards (Barth, 2015). Therefore, it is important for both
of the company to present information that should provide a better understanding and also avoids
the wrong interpretation of the final reports. Hence, understandable financial information helps
the internal and the external parties in developing the better decisions in relation to their
investment, money and legal compliance.
Comparability- The economic decisions needs making the choices among the alternative
action courses. In respect of making decisions, the user will be making comparison among the
alternatives that is facilitated by the financial information (Machdar, DRM and Murwaningsari,
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2017). This quality implies both the firms in having the things that is reported in the similar trend
rather than reporting differently. Accounting information that is comparable present the
differences and the similarities which arises from the basic similarities and the differences in an
organization within their transactions and are not stated from the treatment of financial
accounting.
Consistency- Maintaining consistency of the technique over the time period is seen as the
valuable quality which makes the numbers of an accounting as more and more useful (Iturriaga,
Alvarado, and Herranz, 2018). Constant use of the accounting principles from one accounting
period to the another improves the utility of the final reports to the parties by providing
understanding and analysis of the comparative data.
Neutrality- It act as a main principle in executing and formulating the standards that
should be reliable and relevant of an information of which the results generated does not effect
the new rule that might not be having the particular interest.
Materiality- In order to develop high quality information in the accounting, Jennifer and
See-it-now Ltd must take care of the materiality feature in the overall auditing and the
accounting field (Haller, Link and Groß, 2017). This concept indicates that not all the financial
information must be communicated or presented in the accounting reports but only those
information that are material and essential for reporting.
Timeliness- It means availing an information to the decision makers prior it loses a
capacity in influencing their decisions. Both the companies need to seek for timeliness
information that is either not been available at the time when it is required or is available for
long after a reported events which do not have any value for the future action.
Verifiability- It is also a major verifiability quality that directly contributes towards
usefulness of an accounting information due to the verification purpose and to provide an
important degree of assurance which an accounting measure represented.
Stating one statement that describes the final reports
Balance sheet- It is the statement that contains an information regarding the assets,
liabilities and the capital of the firm at one point of time (Throckmorton and et.al., 2015). This
statement reflects the financial position of an organization.
Income statement- It is one of an important statement that is used for the purpose of
reporting the financial performance of the firms over an accounting period (Williams and
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Dobelman, 2017). It indicates an information relating to the income and the expenses for the
particular period.
Cash flow statement- It referred as the statement that shows the changes in the income
and the account of balance sheet that affects cash equivalents (Minnis and Sutherland, 2017). It
depicts the cash position of the firm by recording for cash inflows and the outflows in an entity.
Statement of an owners equity- It means the statement that report for the changes in an
equity section of balance sheet during the accounting period (Lakis and Masiulevičius, 2017). It
reports for an event that shows decrease and an increase in the stockholders equity during the
course of a particular accounting period.
SECTION B
Total Cost per unit under traditional costing system.
Cost per unit
Particulars Product B Product C
Direct Material Cost £60.00 £80.00
Direct Labour Cost £35.00 £55.00
Manufacturing O/H cost 77.5 108.5
( £155,000/10000 machine hours) (£15.5*5) (£15.5*7)
Manufacturing Cost per unit £172.50 £243.50
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Under or Over absorption for Product B and Product C.
Both the product B and C have ar under absorbed on the machine hours as the actual overhead
cost is higher than the budgeted overhead costs. The evidence is provided below :
Budgeted O/H Actual O/H Under absorption
Cost 155000 185000 30000
Machine hour product
A 5 5 5
Machine hour product
B 7 7 7
Total 12 12 12
O/H cost of A 64583.33 77083.33 12500.00
O/H cost of B 90416.67 107916.67 17500.00
Profits under Marginal and Absorption costing
Absorption Costing
Profit or loss statements using Absorption costing
1000 units
Sales Revenue (1000*60) 60000
14

Marginal cost of sales
Direct materials (1000*10) 10000
Direct Labour (1000*15) 15000
Variable production
overhead (1000*5) 5000
Fixed production
overhead 6000
36000
Add: Opening Stock 0
Less: Closing inventory 0 36000
Gross Profit 24000
Fixed administrative
Cost 2000
2000
15

Net Profit 22000
Marginal Costing
Profit or loss statements using Marginal costing
January
Sales Revenue (1000*60) 60000
Marginal cost of sales
Direct materials (1000*10) 10000
Direct Labour (1000*15) 15000
Variable production
overhead (1000*5) 5000
30000
Add: Opening Stock 0
16

Less: Closing inventory (3000/15000)*1035000 0 30000
Contribution 30000
Fixed production
overhead 6000
Fixed administrative
Cost 2000
8000
Net Profit 22000
Difference between absorption and marginal costing
Marginal costing Absorption costing
It considers only variable cost as its product
cost and the fixed cost as period cost.
While this technique contains both variable as
well as fixed cost as the part of its product cost.
As it does not takes into account fixed cost so
it does not provides a better review of the
profitability.
This method is counted as most useful as it
gives a true view of profits as it includes both
types of the cost.
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CONCLUSION
The above study concludes that financial statements plays a major role in the stating the
financial position and the performance of an enterprise. It also helps in presenting a true and fair
view of the financial health of the company with indicating a cash position of the firm in the
overall market. By considering all the high quality principles while preparing the final reports
helps both the firms in availing an effective information to the users.
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REFERENCES
Books and Journals
Barth, M. E., 2015. Financial accounting research, practice, and financial
accountability. Abacus. 51(4). pp.499-510.
Couillault, B., Mizuguchi, J. and Reed, M., 2017. Collective action: Toward solving a vexing
problem to build a global infrastructure for financial information. Office of Financial
Research, Brief Series. pp.17-01.
Haller, A., Link, M. and Groß, T., 2017. The term ‘non-financial information’–a semantic
analysis of a key feature of current and future corporate reporting. Accounting in
Europe. 14(3). pp.407-429.
Iturriaga, F. L., Alvarado, N. R. and Herranz, C. Z., 2018. THE RIGHT PERSON AT THE
RIGHT TIME: AUDIT COMMITTEE MEMBERS AND THE QUALITY OF
FINANCIAL INFORMATION. UCJC Business and Society Review (formerly known as
Universia Business Review). (58).
Lakis, V. and Masiulevičius, A., 2017. ACCEPTABLE AUDIT MATERIALITY FOR USERS
OF FINANCIAL STATEMENTS. Journal of Management. 2(31).
Machdar, N. M., DRM, A. H. M. and Murwaningsari, E., 2017. The effects of earnings quality,
conservatism, and real earnings management on the company’s performance and
information asymmetry as a moderating variable. International Journal of Economics and
Financial Issues. 7(2). pp.309-318.
Minnis, M. and Sutherland, A., 2017. Financial statements as monitoring mechanisms: Evidence
from small commercial loans. Journal of Accounting Research. 55(1). pp.197-233.
Throckmorton, C. S. and et.al., 2015. Financial fraud detection using vocal, linguistic and
financial cues. Decision Support Systems. 74. pp.78-87.
Williams, E. E. and Dobelman, J. A., 2017. Financial statement analysis. World Scientific Book
Chapters. pp.109-169.
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Winfree, J. A. and et.al., 2018. Financial Statements, Revenues, and Costs. In Sports Finance
and Management (pp. 72-95). Taylor & Francis.
Online
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