What are the differences between management accounting and financial accounting?

What's the difference between management accounting & financial accounting?

Managerial accounting focuses on internal reporting and strategies and problem solving for profitability and long term business success. While a financial accountant is tasked with a more structured, external focus carrying out accurate historical financial recording and reporting.

Inhaltsverzeichnis Show

What's the difference between management accounting & financial accounting?
What is management accounting?
What is financial accounting?
What is Financial Accounting?
Difference between Financial Accounting and Management Accounting
Regulatory Requirements
Governing Principles
Time Horizon
Reporting Beneficiaries
Relevance & Precision of Data
Independent Audit
Confidentiality
Segment Reporting
Perspective
Nature of Input Information
Frequently Asked Questions(FAQs)
RELATED POSTS

Distinctions include role objectives, time frames, and legal requirements, find out more about the differences between management accounting and financial accounting.

What is management accounting?

A management accountant:

Examines various ways to enhance profitability of the business through operational strategies.
Carries out a variety of operational reporting for internal use.
Takes a targeted approach to various areas of the business such as a single product or service profitability.
Focuses on ongoing accounting and business practices throughout the year.
Can be more general, dealing with estimates and expected projections guided by past performance rather than hard financial data.
Concentrates on future financial expectations and goals.
Can customise reporting and accounting practices to the relevant business.
Performs strategic planning consisting of useful information and data to guide business goal setting practices.
Creates highly detailed reports on specific aspects of the business.

What is financial accounting?

A financial accountant:

Performs financial reporting for internal and external regulatory parties, investors, or shareholders.
Provides an overall financial view of the business.
Is focussed on end of year financial reporting and statements.
Is required to maintain meticulous financial recording and reporting systems.
Records in detail the actual financial situation of the business for the last year or financial reporting period.
Must legally adhere to relevant financial and taxation reporting requirements.
Monitors the business financial health and performance.
Is required to produce standard financial reports such as profit and loss, cash flow statements, balance sheets, etc.

Does your Sunshine Coast business need accounting assistance? Schedule a consultation with our experienced business accounting team at 07 5471 7077 or using our online accountant booking form today.

‍

References:

https://www.freshbooks.com/hub/accounting/financial-accounting-vs-managerial-accounting#:~:text=Financial%20accounting%20is%20focused%20on,be%20shared%20within%20a%20company.

https://www.investopedia.com/ask/answers/041015/how-does-financial-accounting-differ-managerial-accounting.asp

https://www.fool.com/the-blueprint/managerial-accounting-vs-financial-accounting/

Financial accounting and management accounting are two terms we often hear in the financial world. Although both are branches of accounting, they are completely different in their function and scope. In this article, let’s discuss in detail the differences between the two, beginning with their broad meaning.

What is Financial Accounting?

Financial accounting is the systematic recording of financial transactions to prepare financial statements that show the position of a business at the end of a period. External stakeholders, mainly investors, creditors, etc., use this information to judge the financial health of the company and take informed decisions.

Table of Contents

What is Financial Accounting?
What is Management Accounting?
Difference between Financial Accounting and Management Accounting
1. Aim
2. Regulatory Requirements
3. Governing Principles
4. Time Horizon
5. Reporting Beneficiaries
6. Outputs
7. Relevance & Precision of Data
8. Independent Audit
9. Confidentiality
10. Segment Reporting
11. Perspective
12. Nature of Input Information
Frequently Asked Questions(FAQs)

On the other hand, management accounting assists an organization in making internal decisions. This accounting is useful for top-level managers like the CEO, CFO, and middle-level managers that include the General Manager, HR, etc. It is often confidential and limited to the company’s management, and it is utilized by management in bringing efficiency and effectiveness to the organization’s operations.

Difference between Financial Accounting and Management Accounting

Points of Difference	Financial Accounting	Management Accounting
Aim	The main aim is to provide information to outside parties to make informed decisions. Outside parties include creditors, investors, customers, etc.	Generally, management accounting information is meant for management to make informed business decisions.
Regulatory Requirements	It is a mandatory requirement for every public organization to disclose its financial statements. Thus, they are governed by accounting standard boards, companies’ laws & government.	It is at the discretion of management. There is no mandatory requirement for its maintenance, but institutes like CIMA, ICWAI, etc., still provide some frameworks and formats.
Governing Principles	Financial accounting statements are prepared based on ‘Generally Accepted Accounting Principles (GAAP).’ This GAAP is different for different countries with more or less the same features.	There is no standard basis for preparing management accounting statements, and hence, they are designed based on the requirements of the management team.
Time Horizon	The time horizon for financial accounting is ‘past, and generally, it is one accounting year.	It has no specific time horizon, but the main focus is on estimating the future using the past data.
Reporting Beneficiaries	It is prepared for outside or external parties, such as shareholders, suppliers, customers, government, banks, etc.	Reports prepared here are helpful to internal parties like CEO, directors, promoters, higher-level managers, etc.
Outputs	Financial accounting reports consist of profit and loss statements, balance sheets, and cash flow statements.	Management accounting reports are the monthly, weekly, or yearly analysis of products, geographies, functions, etc.
Relevance & Precision of Data	Data of financial accounting are 100% verifiable and precise. Here, everything has evidence to support it.	Data of management accounting isn’t necessarily 100% verifiable. So, the data should be relevant, timely, and logical. For instance, sales can’t be forecasted perfectly.
Independent Audit	Independent audit of financial accounting reports is mandatory in most countries. For instance, CPA conducts such audits in the USA, and CA conducts such audits in India.	There is no specific requirement for an independent audit. But, management, at its discretion, can take the initiative to conduct an independent audit for the sake of efficient & effective management.
Confidentiality	Financial accounting statements are publicly published and meant for the public only. So, there is no question of confidentiality.	Management accounting statements are meant for management & confidentiality of the statements is the key concern as they contain business secrets.
Segment Reporting	It is concerned with the whole business & it is an end in itself. Accounting standards in some countries bind companies to do such reporting in defined formats.	It is concerned with a specific area or segment for their analysis. Hence, segments may be a product line, geography, manufacturing unit, etc.
Perspective	It has a historical perspective.	It has a futuristic perspective.
Nature of Input Information	Information required for financial accounting statements is financial in nature.	Both financial and non-financial information is utilized in preparing management accounting reports.

Also read – Cost Accounting and Management Accounting

Frequently Asked Questions(FAQs)

1. Which of the following is a characteristic of managerial accounting?
A. It is not mandatory by any statutory authority.
B. MA statements are for internal use by management.
C. It has no specific time horizon.
D. All of these.

D. All of these.

2. What is the principal reason for preparing managerial accounting reports?

The principal reason for preparing managerial accounting reports is to inform the management about the health of the business and suggests improvements to make informed decisions.

3. Who are the external users of accounting information?

Following are the external users of accounting information:
a) Suppliers.
b) Customers
c) Shareholders.
d) Government.
e) Banks.
f) Investors

4. Which of the following statements does not describe a characteristic of management accounting?
A. There is no specific requirement for an independent audit.
B. Management accounting statements are required for public use only.
C. It uses both financial and non-financial information.

B. Management accounting statements are required for public use only.

Branches of Accounting
Cost Accounting vs. Financial Accounting – All You Need to Know
Importance of GAAP
GAAP vs IFRS – All You Need To Know
Accounting Vs Finance
Types of Accounting

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".