Financial accounting and management accounting are parts of the same accounting system.
Both forms of accounting process the same underlying data to report financial information to its users. For the most part, financial accounting is responsible for disseminating the overall health of the business to external users whereas management accounting produces financial information for internal use within the organization.
Following are the 8 main differences between financial and management accounting:
Objective
Financial accounting aims to report the overall performance and health of a business through the medium of financial statements. Financial statements summarize the financial transactions of an organization and provide a consolidated account of the whole business to external stakeholders such as investors, banks, analysts, government and suppliers.
Management accounting provides detailed financial insights of a business to the internal management of an organization to help them in decision making, financial planning, monitoring, and control of the business.
Focus
Financial accounting reports only the outcome. Management accounting is by contrast more focused on the processes, decisions, and causes that contribute towards the financial bottom-line.
Accounting information is reported to management in much greater detail compared to financial accounting and often covers the operational details of the individual components of business such as activities, processes, departments, products, customers, and regions. This helps organizations to get a deeper understanding of the business and its environment which ultimately has an impact on the organizational performance.
Audience
Financial accounting produces information for external users such as investors, analysts, suppliers, lending institutions, tax authorities, and auditors.
External stakeholders rely on financial statements to evaluate the profitability and riskiness of the business, and to determine a suitable course of action based on their assessment. For example, shareholders may decide to sell their investment if they perceive the company as too risky for their appetite.
Management accounting generates information for internal use by workers, supervisors, management, and owners. Internal users need detailed and timely accounting information for the effective and efficient management of the organization.
Accuracy
Financial Accounting demands a higher level of accuracy because the information is subject to verification by auditors. The information contained in financial statements is verifiable as it relates to historical transactions that have an ascertainable value and a provable record that can confirm their valuation and existence.
Management accountants report a wide range of information to management, not all of which may be quantitative, objective or verifiable.
For example, a feasibility report of a proposed project may include:
- Assumptions (e.g. project implementation within x no. of months)
- Forecasts (e.g. sales volume will increase by x million)
- Qualitative information (e.g. social impact of the project)
- Opinions (e.g. is the project in line with the vision, values and strategic direction of the Company?)
Even though the above information is useful and relevant to management decisions, it is not possible to prove such information due to the subjectivity involved. Since management accounting is not subject to external verification, the information need not adhere to the same standards of accuracy and verifiability as financial accounting.
Compliance
Financial accounting reporting needs to comply with the rules and principles defined in reporting frameworks such as US GAAP and IFRS along with any government regulations.
Management accounting is not subject to any external regulation because the information is produced for internal consumption. Companies may voluntarily define their own internal standards for producing managerial accounting information.
Time Perspective
Financial accounting is a compilation of historical financial data.
Although the preparation of financial statements requires the necessary use of estimates and assumptions (e.g. the useful life of an asset, going concern assumption, etc.), the main focus of financial accounting remains on the reporting of historical financial information.
Management accounting is concerned about the historical data but is also future-oriented which helps organizations to plan ahead by producing budgets, forecasts, estimates, and projections.
Frequency
Reporting of financial accounting is usually carried out on a periodic basis (e.g. quarterly or annual). The timing and frequency of financial reports are subject to the requirements of the law (e.g. must present financial statements once a year) and practical considerations (e.g. alignment of financial reporting cycle with tax reporting cycle).
The regularity and timing of internal reporting are entirely at the discretion of management. Management accounting reporting is generally more frequent than financial accounting which allows managers to act quickly in light of new information.
Nature
Information presented in financial statements is by and large quantitative in nature. Management reporting contains both quantitative and qualitative data.
For example, an investment appraisal report may include a quantitative analysis to determine the financial feasibility of the project, and also a qualitative assessment of its strategic, social and environmental impact.