Difference between Management Accounting and Financial Accounting

This report discusses the differences between management accounting and financial accounting, including their purposes, reporting focus, standards, and more. It also highlights the characteristics of high-quality financial information for management decision-making.

ACCOUNTING

ABSTRACT
The present report will reveal about the different accounting that are financial accounting and the
management accounting. The will report will give understanding of the financial accounting
concepts in Section A and of management accounting techniques in Section B. It will also give
characteristics of quality financial statements to management.

TABLE OF CONTENTS
ABSTRACT.....................................................................................................................................2
INTRODUCTION...........................................................................................................................1
SECTION A1...................................................................................................................................1
1. Journal Entries.........................................................................................................................1
2. Unadjusted Trial Balance.........................................................................................................5
3. Income Statement, owner's equity and balance sheet as at April 30, 2019.............................5
SECTION A2...................................................................................................................................7
Difference between management accounting and financial accounting......................................7
Characteristic of high quality financial information to management of both companies............9
Statement describing each of the financial statements..............................................................10
SECTION B...................................................................................................................................10
Total Cost per unit under traditional costing system.................................................................10
Under or Over absorption for Product B and Product C............................................................11
Profits under Marginal and Absorption costing.........................................................................11
CONCLUSION and RECOMMENDATIONS.............................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Financial accounting refers to the recording of the transactions and events occurring in
the organisation where the management accounting deals with preparing reports that will
enhance the profitability of the company. Both management and financial accounting have
separate importance for the company. The present report is about the financial accounting
methods and the management accounting techniques for recording the separate transactions
(Barron, Chung and Yong, 2016). It will be providing better understanding about both the
accounting methods through solutions.
SECTION A1
1. Journal Entries
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
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
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
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 40000
2

equipment
60000 60000
Dr.
Depreciation A/c
Cr.
Date Particulars Amount Date Particulars Amount
30th April
To computer
Equipment 600 30th April By balance c/d 600
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.
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.
3

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
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
4

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
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. Unadjusted Trial Balance
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
3. Income Statement, owner's equity and balance sheet as at April 30, 2019.
Income statement
5

Particulars Amount Total
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 as at April 30, 2019
Particulars Amount Total
Fixed assets :
Computer equipment 39400 39400
Office supplies 700 700
Total non-current assets 40100
Current assets :
Cash 17300
Prepaid insurance 3400
Accrued commission 1650
Total current assets 22350
Total assets 62450
Equities and liabilities :
Owner's Equity 60000
add: profits 3630
Less : Drawings 1500 62130
Current liabilities:
Outstanding salary 320 320
Total liabilities 62450
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SECTION A2
Difference between management accounting and financial accounting
Financial Accounting
It is concerned with preparing financial statements for outside users like shareholders,
creditors, suppliers, investors, customers and many more. It is an accounting form where proper
records keeping and the financial reporting is done, for providing material and relevant
information to the users (Lento, 2016). FA are based on number of principles, assumptions and
conventions such as materiality, going concern, realisation, conservatism, accrual , historical
costs, consistency etc. Financial statements include Income statements, statements of financial
position and the Cash flow statements that are prepared using guidelines given by statues
(Financial Accounting, 2019).
Management Accounting
It is accounting for managers that helps management of company in formulating policies,
forecasting, and planning & controlling the daily business operations of company. Management
accounting analyses and captures both qualitative and quantitative informations (Collis and
Hussey, 2017). It is not limited with providing the cost and financial accounting information but
also helps management by assisting management in setting goals, budgeting, decision making fir
the business. This accounting do not have specific time frames for preparation it could be
prepared monthly, quarterly or even weekly as per the requirement of management (Thomas,
2016).
It is important to understand the differences between management and financial
accounting as both the accounting are having different path. Financial accounting deals with
aggregating accounting information into the financial statements where the management
accounting deals with the internal process used for accounting of business transactions. There are
differences between management and financial accounting.
Aggregation
Reports for results of entire business is given under financial accounting. Management
accounting have to report in detailed levels like profit per product, product line, customers and
the geographic region.
Efficiency
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Management accounting reports about the issues that are causing variations and solutions
for fixing them where the financial accounting report only over the profitability.
Proven Information
Records of financial accounting requires considerable precision for proving that financial
statements are accurate. Management accounting deals frequently with estimates than verifiable
and proven facts.
Reporting Focus
Management accounting is focused over operational reports, and are only for the internal
information of the company. Financial accounting is concerned with preparation of financial
statements that are useful for both internal and outside users (Thomas, 2016).
Standards
Management accounting is not required to comply with standards as the information is
for internal purposes where financial accounting is required to comply with number of
standards.
Time Periods
Financial accounting are concerned with financial results that the business has achieved
already, therefore it has historical orientation. Management accounting generally address
forecasts and budgets that are future oriented.
Systems
Management accounting is concerned with every bottleneck operations and different ways of
enhancing profits by resolution of bottleneck issues. Financial accounting does not give any
attention over the systems of company for generating profits but with only its outcomes.
Timings
Under financial accounting financial statements are prepared at the end of accounting
period. In management accounting reports are prepared more frequently because information
provided is important and relevant for managers.
Valuation
Financial accounting provides proper valuation of the assets & liabilities, including
revaluations , impairments and so forth where management accounting is only concerned with
their productivity and not their valuation.
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The professional certifications in each of the area are also different. In financial accounting
people are given certification of Certified Public Accountant. In management accounting
certificate is provided of Certified Management Accountant.
Characteristic of high quality financial information to management of both companies.
Managers of the company strive for making process decision which helps in making
capital work harder for company or for decreasing overhead costs. Managers have tools for
accomplishing their desired goals if they have adequate understanding of the financial
information of the company. Financial statements provide informations to the management that
are very important for decision making process. The decisions will be sound and effective only
when the information provided in the financial statements are correct and accurate.
Characteristics of high quality financial statements could be defined as having :
Relevance
Relevance is directly and closely related to concept of the useful information.
Information provided in the financial statements should have relevance to what is needed by
users, that is circumstances when financial information could influence economic decisions of its
users. It involves reporting specifically relevant information or the misstatement or omission of
the financial information can influence the decisions of the management. Management will be
able to take correct decisions only if the information provided is relevant to the issue for which
decision is to be taken (Rahman, and Fachri, 2016). Financial information should be capable in
making difference in decisions for making predictions about past, present or the future events.
Reliability
It is one of the primary quality that is essential for making the financial information
useful to the management for decisions making. Information should be reliable so that
judgements about earning financial and potential position of company could be made. Reliability
differs depending on the items of financial statements. Financial information should not have any
material error, bias or misleading items or statements. Information provided should accurately
represent the transactions & all events, reflecting underlying substances of event and should
prudently represent uncertainties and estimates through disclosures (Järvenpää and Länsiluoto,
2016).
Understandability
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Understandability refers to quality of the information enabling users in perceiving its
significance. Information could be more useful if it is made more understandable to the
management. Presenting informations that are understandable by only sophisticated users rather
than other members of the management will create bias that is not consistent with adequate
disclosure standard. Financial information is not restricted to facilitating understandability but
also avoiding wrong interpretations of financial statements. The management should be able to
understand the financial statements in the right manner (Characteristics of Qualitative Financial
Statements, 2019). Information provided should be understandable with supporting disclosures
for clarifications. Management for framing proper policies and procedures are required to have
proper understanding of the financial information of the company.
Comparability
Economic decisions are required to have choices among the possible course of actions.
Management can formulate strategies for company that will help it to grow in market therefore it
is essential that the financial information must be comparable. Management should be capable
of making comparisons among the potential alternatives by the financial informations. If the
financial information do not have comparability management would not be able to find out the
position of it firm against that of its competitors (Abernethy and Wallis, 2018.). Management
through comparable financial information could find out the strength and weakness of the
business or businesses and the accounting transactions.
Statement describing each of the financial statements.
Balance sheet – Gives information about the financial health and position of company.
Income Statements – The profitability of the company after carrying its operations.
Owner's Equity – It represents changes in the capital investment ion company.
Cash Flow Statement – It represents the liquidity position of company.
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
10

( £155,000/10000
machine hours) (£15.5*5) (£15.5*7)
Manufacturing Cost per
unit £172.50 £243.50
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
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 2000
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Cost
2000
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
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 costing and marginal costing
Marginal Costing refers to the method where variable cost are considered as product cost
and fixed cost are considered cost for the period (Marginal Costing, 2019). On the other hand
absorption costing refers to method considering both variable and fixed cost as the products cost.
Costing method is essential specifically for the reporting purposes. As the techniques are
different from each other therefore differences are also there in both the techniques.
Basis for Marginal Costing Absorption Costing
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comparisons
Meaning Marginal Costing is decision making
method for ascertaining total
production costs.
Absorption costing refers to
apportionment of the total costs to
cost centres for determining total
production costs.
Cost Recognition Variable costs are considered as the
product cost and fixed cost are
considered as the fixed cost
(Difference between marginal and
absorption costing, 2019).
Both variable and fixed cost are
considers to be product cost.
Overhead
classification
Variable and Fixed Production, Administrative and
selling and distribution
Profitability Profit volume ratio is used for
measuring profitability.
Fixed cost inclusion affects the
profitability.
Per unit cost Variances in closing and opening
stock do not confluence per unit cost
of output .
Per unit cost of the product is
affected by variances in opening &
closing stocks.
Highlights Per unit contribution Per unit Net profit
Cost Data It is presented for outlining the total
contribution per product.
It is presented in the conventional
way (Difference between marginal
and absorption costing, 2019).
CONCLUSION and RECOMMENDATIONS
From the above research it could be conclude that the management and financial
accounting is essential for the management of the companies for making accurate and correct
decisions. The financial informations enable the managers to formulate strategies and take
corrective measures using the information. Management accounting enable managers in
preparing the budgets for future operation of company. Companies should adopt for absorption
costing for the production as it cover all the cost including fixed cost that gives more accurate
and reliable information to the users and also helps in tracking profits accurately.
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REFERENCES
Books and Journals
Barron, O.E., Chung, S.G. and Yong, K.O., 2016. The effect of Statement of Financial
Accounting Standards No. 157 Fair Value Measurements on analysts’ information
environment. Journal of accounting and public policy. 35(4). pp.395-416.
Lento, C., 2016. Promoting active learning in introductory financial accounting through the
flipped classroom design. Journal of Applied Research in Higher Education. 8(1). pp.72-
87.
Rahman, A. and Fachri, Z., 2016. Region’ s Financial Accounting Information System and
the Quality of Local Government Financial Reports. Information Management and
Business Review. 8(4). pp.64-68.
Inuwa, U., Abdullah, Z. and Hassan, H., 2017. Assessing the Effect of Cooperative Learning on
Financial Accounting Achievement among Secondary School Students. International
Journal of Instruction. 10(3). pp.31-46.
Hiebl, M.R., 2018. Management accounting as a political resource for enabling embedded
agency. Management Accounting Research. 38. pp.22-38.
Collis, J. and Hussey, R., 2017. Cost and management accounting. Macmillan International
Higher Education.
Thomas, T.F., 2016. Motivating revisions of management accounting systems: An examination
of organizational goals and accounting feedback. Accounting, Organizations and
Society. 53. pp.1-16.
Eldenburg, L.G., Krishnan, H.A. and Krishnan, R., 2017. Management accounting and control in
the hospital industry: A review. Journal of Governmental & Nonprofit Accounting. 6(1).
pp.52-91.
Järvenpää, M. and Länsiluoto, A., 2016. Collective identity, institutional logic and environmental
management accounting change. Journal of Accounting & Organizational Change. 12(2).
pp.152-176.
Abernethy, M.A. and Wallis, M.S., 2018. Critique on the'manager effects' research and
implications for management accounting research. Journal of Management Accounting
Research.
Online
Financial Accounting. 2019. [Online]. Available through :
<https://www.accountingcoach.com/financial-accounting/explanation>.
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Marginal Costing. 2019. [Online]. Available through : <https://businessjargons.com/marginal-
costing.html>.
Characteristics of Qualitative Financial Statements. 2019. [Online]. Available through :
<https://www.accountingformanagement.org/qualitative-characteristics-of-financial-statements/
>.
Difference between marginal and absorption costing. 2019. [Online]. Available through :
<https://www.wallstreetmojo.com/marginal-costing-vs-absorption-costing/>.
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