Difference between Financial Accounting and Management Accounting
Financial accounting and management accounting both tend to be similar in that both examine the effect of business transactions and organizational activities, and record and analyze the results of those transactions. Both provide information for internal as well as external use.
However, management accounting, though it has its origin from financial accounting, varies from the latter in the following respects.
Key points of difference – Difference between financial accounting and management accounting
1. What they mean?
Financial accounting, as we all know, is the process of preparing financial statements that businesses use to explain their financial results and status to people outside the company, including investors, creditors, suppliers, and consumers.
Management accounting refers to managerial processes and technologies that seek to add value to companies by making efficient use of resources in a complex and competitive setting. It is a distinctive type of resource management that supports management’s decision-making by generating information for managers within an organization.
2. What do they deal with?
Financial accounting deals with corporate operations and activities for the business as a whole. Management accounting, in addition to the analysis of activities in relation to business as a whole, envisages an organization in its different units and segments and seeks to track the impact and effect of business transactions/events through its various divisions and subdivisions. Thus, while financial statements – the profit and loss account, the balance sheet, and the cash flow statement show the financial health and status of an organization, management accounting reports concentrate on specifics of operating costs, inventories, goods, processes, and jobs. It traces the effect and impact of business transactions or events on costs, inventories, operations, jobs, and goods.
Financial accounting is more closely related to reporting the performance and status of a company to individuals and authorities other than the management, i.e., government, creditors, investors, shareholders, etc. It often follows window-dressing techniques in order to project a better picture than the real image of an organization. On the other hand, management accounting is more concerned with producing information for the use of internal management and as a result, the information represents the actual or expected situation.
4. Which is more predictive?
Financial accounting is inherently historic. It tracks and analyses business activities long after they have taken place. Management accounting analyses incidents as they take place and even anticipates such events (or incidents) for the future. Thus, it uses details that are generally relevant to the future.
Since financial accounting data is historical in nature, it is more precise than management accounting data, which typically represents the expected future, and could therefore only be an approximation. This provides the necessary rapidity to management accounting information.
The periodicity of reporting of financial statements is much longer than that of management accounting. Overall, financial accounting results are published on a year-to-year basis. Management accounting is used for weekly, fortnightly, and even monthly reporting.
7. What principles govern them?
Financial accounting must be governed by “generally accepted principles.” This is so because it has to satisfy the informational needs of outsiders. It must be consistent with the widely accepted methods of presenting such financial information. With regard to the content and type of information, financial accounting also has to comply with the provisions of the company law.
Conversely, management accounting does not have to think about such legal and/or standard restrictions and “generally accepted principles.” It is free to devise its own rules, procedures, and forms since the information it produces is intended solely for internal use. In management accounting, fixed assets may be listed at appraisal rates, overhead costs may be omitted from inventories, or revenue may be registered prior to realization. “Generally accepted principles” of financial accounting do not allow for such accounts.
What is important in management accounting is the utility and relevance of the information to managerial functions rather than its general acceptability. The form and content of information vary according to the needs and intent.
8. Which is mandatory?
Financial accounting is a prerequisite for joint-stock companies to comply with the legislative requirements of corporate law and tax law. Even in the case of sole proprietorships and partnerships, financial accounting becomes essential for tax purposes. Management accounting, on the other hand, is completely optional, and its methods and contents depend on the viewpoint of the management.
Financial statements prepared in line with financial accounting standards shall comprise only monetary details. However, management accounting statements, in addition to monetary information, often consist of non-monetary information, i.e., the number of materials consumed, number of staff, quantity of goods produced and sold, and so on.
Financial statements need to be published and audited by statutory auditors. Management accounting statements are meant for internal use and are, therefore, neither published nor audited.
Comparison table – Difference between financial accounting and management accounting
|Basis of difference||Financial accounting||Management Accounting|
|Focus||Concentrate on overall financial health and status of the business||Concentrate on details of operating costs, inventories, goods, processes, and jobs|
|Reporting||External authorities and shareholders||Internal management|
|Emphasis||Emphasis is put on the overview of financial implications of past activities||Emphasis is put on business decisions affecting the future|
|Precision||More precise||Subject to estimation|
|Period of reporting||Annual||Weekly, fortnightly, and even monthly|
|Governing rules||Generally accepted accounting principles/ Accounting standards||Form and content of information varies according to the management’s needs and intent|
|Whether mandatory?||Compulsory||Not compulsory|
|Monetary information||Only monetary details||Both monetary and non-monetary information|
|Kind of reports||Only summarized data for the entire company is prepared||Detailed segment reports about different departments, products, customers, regions, employees, etc. are prepared|
Financial accounting reports are designed for the use of external stakeholders such as shareholders and creditors, while management accounting reports are prepared for managers within the company.
The key purpose of management accounting is the creation of important and useful information that can be used internally by a business. Information is gathered by managers, in particular, to facilitate strategic planning and to establish realistic objectives. Financial accounting does have internal value but is majorly required by stakeholders outside an entity since it seeks to disclose the financial health of the business and its performance.