Solution 1.4

Distinguish between financial and management accounting and discuss the role both of them have in an organisation.

Financial accounting is primarily a method of reporting the results and the financial position of a business.  Financial Accounts are required by Company Law and accounting standards.  Management accounting is an internal reporting system for the organisation's own management.  It provides management with the information required to manage the business.

Key differences between Cost & Financial Accounting

Cost Financial
*Internal - management reporting *External - reports to outside world
*Not required by Law *Must comply with the Company’s Act
*Not required to follow SSAP/FRS requirements *Required  to follow SSAP/FRS requirements
*Looks at past, present and future *Historical record
*Provides detailed analysis *Provides overview

Financial accounting is the recording of actual monetary transactions of a business in accordance with the rules in the accounting standards and company law.  The Profit and Loss Account, Balance Sheet and Funds Flow will be used to provide those external to the main running of the organisation with a summary of what has happened in the past accounting period.  The role of financial accounting can be summarised as the recording of all actual business transactions that have happened, and the reporting to those both internal and external to the organisation a true and accurate picture of what has happened in the past accounting period.  

Management accounting concerns detailed analysis of information for the internal management of the organisation.  As it is mainly for internal use it is not necessary for the accountant to comply with the rules in the accounting standards and company law.  The cost accountant will be concerned with; 

  • what was the cost of goods produced or services provided?
  • what are future costs likely to be?
  • how do actual costs compare with budget?
  • what information is needed by management in decision making?
  The role of the cost accountant would be the analysis and presentation of information to assist in the internal running of the organisation, and the preparation of budgets and standards so that control can be achieved.