By Jackie, Researcher
Topic: Types of Accounting (Terminology & Concepts)
The objectives of this research are to find out what are the major differences between financial accounting and management accounting.
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| Management Accounting sometimes is also known as 'Managerial Accounting'. |
First and foremost, management accounting is concerned with the provision of information to people within the organization or ‘internal parties’ (i.e. managers inside the organization) to help them to make better decisions and improve the efficiency and effectiveness of existing operations, whereas financial accounting is concerned with the provision of information to ‘external parties’ outside the organization (e.g. shareholders, creditors, tax authorities, regulators, potential investors, and etc). Thus, management accounting could be called ‘internal reporting’ and financial accounting could be called ‘external reporting’.
Secondly, there is a statutory requirement for public limited companies to produce annual financial accounts regardless of whether or not management regards this information as useful. It must be done as it is ‘mandatory’. Management accounting, by contrast, is entirely optional and information should be produced only if it is considered that benefits from the use of the information by management exceed the cost of collecting it. Thus, it is not ‘mandatory’. A company is completely free to do as much or as little as it wishes.
Thirdly, financial accounting reports describe the whole of the business whereas management accounting focuses on small parts of the organization such as the cost and profitability of products, services, customers and activities. In addition, management accounting information measures the economic performance of decentralized operating units, such as parts, segments, divisions or departments.
Besides, financial accounting statements must be prepared to conform with the legal requirements and the generally accepted accounting principles established by the regulatory bodies such as the Financial Accounting Standards Board (FASB) in the USA, the Accounting Standards Board (ASB) in the UK and the International Accounting Standards Board (IASB) to ensure the uniformity and consistency that is required for external financial statements are achieved so that the inter-company and historical comparisons are possible. Thus, financial accounting data should be objective and verifiable. In contrast, management accountants are not required to adhere to generally accepted accounting principles when providing managerial information for internal purposes. Instead, the focus is on the serving management’s needs and providing information that is useful to managers relating to their decision-making, planning and control functions.
Furthermore, financial accounting reports what has happened in the past in an organization, whereas management accounting is concerned with future information as well as past information. Decisions are concerned with future events and management therefore requires details of expected future costs and revenues. In other words, financial accounting is past-oriented (eg. Reports on 2010 performance were prepared in 2011) and management accounting is future-oriented (eg. Budget for 2011 was prepared in 2010).
In addition, a detailed set of financial accounts is published annually and less detailed accounts are published semi-annually. Management requires information quickly if it is to act on it. Consequently, management accounting reports on various activities may be prepared at daily, weekly or monthly intervals.
Summary
Additional readings, related links and references:
Differences between financial and managerial accounting
The Differences between Financial Accounting & Management Accounting
Financial and Managerial Accounting Information
Financial Accounting Vs Managerial Accounting (Cute cartoon illustration)
Dennis Ensing, CA of WiseMentorCapital, discusses the differences between financial and managerial accounting. Visit StartMeUpRyerson.com for more resources to help turn your ideas into reality.
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