Management accounting is an accounting function which is very different to that of financial accounting. We’ll start by explaining what we mean by financial accounting and then progress to explain the key components of management accounting and illustrate the difference to financial accounting.
Financial accounting predominantly focuses on the statutory reporting requirements and is concerned with the reporting of historic, actual financial information. This is typically in the form of the Annual Company Accounts and consists of a profit and loss account, a balance sheet and a cash flow statement.
Management accounting is quite different to financial accounting and is often more forward looking than financial accounting. Management accounting is often used for management decision making within an organisation whereas financial accounting is often undertaken to satisfy external legislative requirements and is used by external parties such as the tax man (HMRC).
The typical components of management accounting can be seen to be:
1. Planning and budgeting
2. Project decision making
3. Performance measurement
5. Variance analysis
6. Pricing and costing
Management accounting relies heavily on forecasts, trends and other future considerations to reach conclusions or to inform operational decisions.