CONTRASTING FINANCIAL ACCOUNTING AND MANAGERIAL ACCOUNTING
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financial_vs_managerial_accounting.docWhat is the difference between financial accounting and management accounting?
CONTRAST FINANCIAL ACCOUNTING AND MANAGERIAL ACCOUNTING
Financial and management accounting are both important tools for a business, but serve different purposes. A business uses accounting to determine operational plans in the future, to review past performance and to check current business functions. Management and financial accounting have different audiences, as investors are not usually involved in the day-to-day operations of the business but are concerned about their investment, whereas managers need information quickly to make daily business decisions.
Management accounting is a field of accounting that analyzes and provides cost information to the internal management for the purposes of planning, controlling and decision making.
Because it is manager oriented, any study of managerial accounting must be preceded by some understanding of what managers do, the information managers need, and the general business environment.
Regulation and standardization
While financial accountants follow Generally Accepted Accounting Principles (GAAP) set by professional bodies in each country or International Financial Reporting Standards, managerial accountants make use of procedures and processes that are not regulated by a standard-setting bodies.
The following are some of the differences between Financial Accounting and Managerial Accounting:
Comparison chart
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Financial Accounting |
Management Accounting |
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External vs. Internal |
A financial accounting system produces information that is used by parties external to the organization, such as shareholders, bank and creditors. |
A management accounting system produces information that is used within an organization, by managers and employees. |
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Segment reporting |
Pertains to the entire organization or materially significant business units. |
May pertain to smaller business units or individual departments, in addition to the entire organization. |
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Focus |
Financial accounting focuses on history. |
Management accounting focuses on future & present. |
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Format |
Financial accounts are supposed to be in accordance with a specific format, so that financial accounts of different organizations can be easily compared. (Formal recordkeeping) |
No specific format is designed for management accounting systems. (Formal and informal recordkeeping) |
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Planning and control |
Financial accounting helps in making investment decisions, and in credit rating. |
Management accounting helps management to record, plan and control activities to aid decision-making process. |
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Information |
Quantitative and monetary |
Quantitative and qualitative; Monetary and non-monetary |
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Users |
Financial accounting reports are primarily used by external users, such as shareholders, bank and creditors. |
Management accounting reports are exclusively used by internal users viz. managers and employees. |
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Reporting frequency and duration |
Well-defined - annually, semi-annually, quarterly. (Verifiable) |
As needed - daily, weekly, monthly. |
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Optional? |
Preparing financial accounting reports are mandatory especially for limited companies. |
There are no legal requirements to prepare reports on management accounting. |
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Objectives |
The main objectives of financial accounting are :i) to disclose the end results of the business, and ii) to depict the financial condition of the business on a particular date. |
The main objectives of Management Accounting are to help management by providing information used by management to plan, evaluate, and control. |
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Legal/rules |
Drafted according to GAAP - General Accepted Accounting Procedure. |
Drafted according to management suitability. |
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Accounting process |
Follows a full process of recording, classifying, and summarizing for the purpose of analysis and interpretation of the financial information. |
Cost accounts are not preserved under Management Accounting. The necessary data from financial statements and cost ledgers are analyzed. |
