Financial accounting and management accounting are two popular terms in the financial sector. Although they are both branches of accounting, they vary in their scope and function. This blog shall discuss some of the key differences between financial and management accounting. Stay with us and read on.
Financial accounting & management accounting – Meaning and importance
Before we dig into the comparison between financial and management accounting, let us take a close look at their definitions.
Financial accounting
It is that branch of accounting that involves the process of recording, summarizing, and reporting different business transactions over a period of time. It revolves around four basic financial statements namely balance sheet, income statement, cash flow statement, and statement of owner’s equity. Financial accounting is indispensable as it helps businesses track their transactions and generate better financial forecasts.
Here are some of its top functionalities:
- Financial accounting helps keep a tab on large volumes of business transactions and maintain a systematic record of the same.
- One of the best parts about financial accounting is that it enables you to validate all your business transactions. As it adheres to universally accepted accounting principles, it adds authenticity to all your financial records.
- With accurate financial statements and business reports, financial accounting helps interpret the financial health of your business organisation.
Management accounting
Management accounting, also known as managerial accounting, is defined as that branch of accounting that involves the identification, measurement, and interpretation of all sorts of financial information. Everything that is shared is for internal purposes only helps managers make well-informed business decisions. Management accounting can be leveraged by top level executives such as the CEO and CFO or even mid-levels managers such as HRs.
Let’s quickly take a look at some top functionalities of management accounting:
- Managerial accounting is essential for preparing management reports for your organisation’s internal use. It provides you with a large database that helps you track your business progress and make better financial forecasts.
- Also, with management accounting, you can modify all financial data as per the management’s requirements and create more organised management reports.
- Detailed analysis of business transactions is necessary for effective decision making. This is exactly where management accounting comes into play. It helps you analyse and interpret financial data in a comparative manner. All financial trends are presented in a transparent way.
- Management accounting is not limited to financial data only. It also provides you with qualitative information that can be measured in monetary terms. This way, you can get a clear view of your organization’s performance.
Financial accounting and management accounting – Major differences
Financial accounting and management accounting are parts of the basic accounting system and are responsible for maintaining a track of economic events. However, their functionalities are entirely different. In this section, we shall discuss the same in detail. Here are some points of difference:
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Purpose
The main objective of financial accounting is to determine your business’ financial condition and end results over a certain time period. It is specifically focused on generating profit for your company.
On the other hand, the intention of management accounting is to assist management by offering valuable financial information that can help make better business goals. It tends to identify bottleneck business operations and eliminate them.
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Nature of reporting
When it comes to financial accounting, it is mainly focused on the creation of financial statements that are to be shared to both internal and external stakeholders. External stakeholders include creditors, bank institutions, and investors. In fact, financial accounting reports are also shared with the public. Conversely, management or managerial accounting focuses on operational reporting within internal stakeholders.
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Orientation type
Financial accounting is historical in nature. It is purely based on past financial records and transactions. Financial accounting revolves around the financial results that your business has already attained.
Management accounting is forward-looking in nature. It analyses past financial performance and helps you make accurate business forecasts.
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Accounting principles and standards
There is a major difference between financial and management accounting with regard to their legal status. It is mandatory in financial accounting to comply with various accounting standards and principles. Since the reports are used by investors and presented for public review, it is essential that you’re careful about how you report financial figures.
For instance, in the US, all financial accounting reports are required to be governed by GAAP (Generally Accepted Accounting Principles).
On the contrary, there is no such compliance requirement in management accounting as all financial information is for internal use only. Your entity is entirely free to use its own rules while creating reports.
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Data and proven information
As financial accounting revolves around financial statements and reporting, it relies heavily on accurate data and proven information. But management accounting is based mainly on estimates.
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Timing
In case of financial accounting, financial statements should be issued at the end of a fixed accounting cycle. On the other hand, management accounting requires the issuing of reports more frequently. The reports are generally technical, detailed, and experimental and help you identify the best competitive advantage for your business.
Wrapping up
We hope our article helped you understand the major differences between financial accounting and management accounting. Both financial and management accounting is essential to help your business stay on top of financial wellness. While financial accounting helps you compare your company’s performance between two accounting periods, management accounting helps formulate better financial strategies and boosts business growth. If you want to keep up with changing business environments, it is important that you have both financial and management accounting system in place.
