Management accounting is a process through which a company prepares reports for the top management. The company bases its major executive decisions on these reports. Management accounting facilitates short-term decision-making. Management accounting is often referred to as “managerial accounting” or "cost accounting". The reports prepared show the cash the company has in hand, the sales amounts, amount of sales returns, the purchases of materials, the purchase returns, the value of the work-in-progress and the payables and receivables.
Reports for Internal Usage
Management accounts are always prepared for the company's internal use. Financial statements are prepared for both the management as well as external stakeholders such as the investors, the creditors and the government. These reports are never furnished to the public. The purview of management accounting is smaller than that of financial accounting. These reports are always for internal decision-making purposes.
Management accounting involves identifying, measuring, accumulating, analyzing, preparing and communicating vital financial information to the management. The management uses this information for planning and controlling their activities. Management accounting is always object-oriented. For example, managers use this information for reviewing the amount of cash they have in hand and then they devise strategies to make optimum utilization of the cash.
Management accounting prepares reports that are always short term in nature. The reports may be prepared every day, week or fortnight. The managers are quickly able to identify the deviations that have occurred in the company's projected path, allowing remedial measures to be taken immediately if necessary. For example, if the company is receiving a lot of returns after it sells its finished product, it means there is something wrong with the product. The company then reviews the product and rectifies the anomalies.
Financial accounting pertains to the company as a whole whereas management accounting is used for every subunit in the organization. For example, the production department of the company may prepare ts own management accounts and the marketing department its own accounts. Management accounting analyzes each unit as a strategic business unit in itself and analyzes its profitability and cost features. This way the company is able to take measures to align all units to the broader organizational picture.