What is the difference between financial accounting, cost accounting & management accounting?

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What is the difference between financial accounting, cost accounting & management accounting?
Cost accounting is used to determine the price goods are sold for. (Jupiterimages/BananaStock/Getty Images)

All accountants produce financial reports that detail a company's financial position but, depending on their particular area of speciality, those reports may be aimed at investors, outside agencies or purely for the benefit of the senior management of the company itself. Reports produced by financial, cost and management accountants all help ensure a company is able to remain profitable.

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Financial accounting

Financial accounting provides information about the financial performance of a company during a particular period of time. All limited companies are required by law to produce financial accounts on an annual basis and these must confirm to strict guidelines. The information contained within financial accounts is aimed chiefly at those outside the company such as investors and creditors, though it remains of great interest to those inside a company as well. Financial accounting reports contain information on cash flow, assets and show whether a company made a profit or loss during the reporting period.

Management accounting

Management accounting provides information that enables the board of directors of a company to make decisions about the future direction of the enterprise. Unlike financial accounting reports, management accounting follows no set format and is not a legal requirement. The information contained within management accounts is more detailed than that in financial accounts and includes estimates and forecasts about future costs and sales.

Cost accounting

Cost accounting is a key element of management accounting. It involves in-depth analysis and evaluation of all the costs involved in producing products or delivering services. Cost accountants consider every financial aspect of a company's business, from rent and salary payments to the cost of raw materials and packaging, in order to accurately determine the best price for the company to charge. Effective cost accounting is essential in ensuring a business remains profitable.

Key differences

Financial accounting aims to produce reports that focus on the historical and current financial situation of a company while management accounting attempts to analyse and predict the future financial situation of a company. While financial accounts have to be produced to strict deadlines, management accounts are produced as and when they are needed in order to assist with the decision making process. Financial accounting reports are distributed to a wide range of people but management accounting reports are highly confidential as the information they contain could be of great use to business rivals.

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