The success of a business is contingent on its financial management. The ability to manage finances helps organizations to increase their profitability. It adds to their business’s equity and overall growth. In addition, proper management of finances ensures financial stability and provides employees with a sense of security. Therefore, effective management of finances plays a vital role in the success of a business.
When it comes to managing finances, there are two areas that one needs to take into consideration, namely financial accounting and management accounting. Although both are the fundamental pillars of business organizations and interdependent, there are still some differences. People often confuse financial accounting with management accounting but they are different.
This blog is going to be a comprehensive guide on the basics of financial accounting and management accounting. It will also list the differences between the two.
Understanding Financial Accounting
Businesses deal with financial transactions on a daily basis. The process of recording, summarizing, and analyzing business transactions comes under financial accounting. All business transactions are assessed in the form of financial statements, such as balance sheets, income statements, and the cash flow statements of a business organization over a certain period.
Working Principles of Financial Accounting
Although, there are a large number of accounting principles, not all come in handy for all types of businesses. The use of accounting principles is heavily dependent on the type and nature of a business. Moreover, these principles are also determined by the regulatory and financial reporting requirements of a business.
Understanding Management Accounting
Every business should have its financial goals in sight. These goals determine the success of a business. Management accounting deals with devising ways to achieve business goals. Management accountants do so, by identifying, measuring, analyzing, interpreting, and transferring financial information to the concerned people. Unlike, financial accounting, management accounting is focused on assessing business transactions in a manner that benefits the business.
Working Principle of Management Accounting
The basic principle of management accounting is to minimize unnecessary spending and speed up profit gain. Management accountants do so by carefully monitoring business operations. They compare sales cost with revenue generation to devise ways to generate more profit at lower sales rates.
Financial Accounting vs. Management Accounting
Although, both, financial and management accounting are focused on improving and encouraging business growth but slightly differ in their work. Financial accountants work to provide a clear view of the financial standing of a business. In contrast, management accountants are focused on providing qualitative as well as quantitative data to the business managers to help them find ways to increase revenue generation.
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