What is the difference between Financial Accounting and Management Accounting?

Financial accounting and management accounting are like the two legs of the same human. The function of both of them is to ensure that the management progresses toward a better future.

But management accounting is much broader than financial accounting in helping management since the subject “management accounting” is created to serve the management (yes, only the management).

Financial accounting, on the other hand, is a niche subject which helps management see how a company is doing financially. Though financial accounting is created for stakeholders and potential investors who can look at the books of financial accounts and decide for themselves whether they would invest into the company or not.

That means the risk of financial accounting is much more visible than management accounting. Remember the “Satyam Scandal” where manipulation of accounts was on forefront! Since management accounting helps to create reports for internal purpose, the risk is not always visible.

Managerial accounting is more concerned with operational reports, which are only distributed within a company. Standards. Financial accounting must comply with various accounting standards, whereas managerial accounting does not have to comply with any standards when information is compiled for internal consumption.

Financial Accounting is an accounting system that focuses on the preparation of financial statement of an organization to provide the financial information to the interested parties.

The accounting system which provides relevant information to the managers to make policies, plans and strategies for running the business effectively is known as Management Accounting.

 

Main focus of Financial Accounting is summarizing and reporting a financial position of the business for outside business entities such as stockholders, creditors, government agencies and suppliers.

 

Management accounting provides financial information for the organization's internal management, its employees, managers and executives, in order to inform decision-making and improve performance. 

 

 

Briefly, financial accounting for external audience, and the management accounting for internal management community

Financial Accounting is mere recording accounting entries for transactions done irrespective of the value - could be 1 cent or even a fraction of a cent or any amount.

Management Accounting is a tool that helps the management in financial planning activities like how funds to be brought in for the business and how the brought in funds be spent.

Financial Accounting

Follow IFRS, GAAP

For External Users

Historical Perspective

Whereas Managment Accounting

Doesn't follow any rule, its concept based

For internal users

Future Oriented

 

1. Management accounting provides information to people within an organization while financial accounting is mainly for those outside it, such as shareholders
2. Financial accounting is required by law while management accounting is not. Specific standards and formats may be required for statutory accounts such as in the I.A.S International Accounting Standard within Europe.
3. Financial accounting covers the entire organization while management accounting may be concerned with particular products or cost centres.

Managerial accounting is used primarily by those within a company or organization. Reports can be generated for any period of time such as daily, weekly or monthly. Reports are considered to be "future looking" and have forecasting value to those within the company.

Financial accounting is used primarily by those outside of a company or organization. Financial reports are usually created for a set period of time, such as a financial year or period. Financial reports are historically factual and have predictive value to those who wish to make financial decisions or investments in a company. Management Accounting is the branch of Accounting that deals primarily with confidential financial reports for the exclusive use of top management within an organization. These reports are prepared utilizing scientific and statistical methods to arrive at certain monetary values which are then used for decision making. Such reports may include:

• Sales Forecasting reports
• Budget analysis and comparative analysis
• Feasibility studies
• Merger and consolidation reports

Financial Accounting, on the other hand, concentrates on the production of financial reports, including the basic reporting requirements of profitability, liquidity, solvency and stability. Reports of this nature can be accessed by internal and external users such as the shareholders, the banks and the creditors.

 

Management Accounting information: financial and operating data about an organization's activities, processes, operating units, products, services, and customers:e.g., the calculated cost of aproduct, an activity, or department in a recent time period.

Management Accounting systems provide information to managers and employees within an organization.

Financial Accounting : the process of producing financial statements for external constituenciespepole outside the organization, such as shareholders, creditors, and governmental authorities. this process is heavily constrained by standardsetting, regulatory, and tax authorities and the auditing requirements of independent accountants.

Financial Accounting reports,in contrast, communicate economic information to individuals and organizations that are external to the direct operations of a company, such as shareholders, creditors,regulators, and governmental tax autnorities

 

Financial accounting depends on historical dataAdministrative accounting relies on data from its planned data plan and actual data and compares it and uses historical data as guidanceIn terms of users:Financial accounting is based on the service of external users and external parties from taxes, banks, lenders and investors in addition to ownersAdministrative accounting is an information system that serves the management mainly in making decisions, but rationalizing those decisions based on the service departments of various originAccounting management is based on financial data and a system such as performance reports and cost reports. Asilib uses mathematical methods such as operations research, statistics, linear programming and programming objectives to arrive at the optimal solution and the correct choice between the alternatives and the study of some decisions such as the decision of manufacturing or purchasing, the decision of financial lease or purchase, Add new energyInfluenced by the external environmentFinancial accounting is affected by the external environment in terms of legislation, laws, policies of customers, suppliers and competitors

Manangerial Accounying: -It tends to look at process rather than cash flow,profit or other financial metrics. -It depends on purview of the manager -It concentrate on shorter periods,permiting managers to act quickly on current bussiness. -Financial Accounting: -use hestorical data -Use standard Accounting practices -It compiles transaction with Financial Statements i’m mind