Difference between Financial Accounting and Management Accounting

Difference Between Financial Accounting and Management Accounting

Accounting may be broadly classified into two categories; accounting which is meant to serve all parties external to the operating responsibility of the firm and accounting designed for use in the operational needs of the firm.

The first category looks after the interests of those who have primarily a financial stake in the organization’s affairs like creditors, stakeholders, employees, regulatory bodies, and the public in general. This is conventionally referred to as ‘financial accounting’. On the other hand, accounting which is primarily concerned with providing information relating to the conduct of the various aspects of a business like cost or profit associated with some portions of business operation is called ‘Management Accounting‘.

During the initial stages of its development and even till very recently, accounting has been mostly developed as an instrument forged to satisfy the requirements imposed by the judiciary, relationships between the firms and their owners as well as other parties connected with the business enterprise. As described by the Accounting Terminology Bulletin of the American Institute of Certified Public Accountants, financial accounting is ‘the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions, and events which are, in part at least, of a financial character, and interpreting the results thereof.“

While management looks to all information resources for assistance, those dealing with the actual historical and monetary consequences, which are objectively verifiable, find expression in financial accounting records. Attempts to include data regarding future events, opportunities not actually experienced, or non-monetary descriptions of business events would hardly be financial accounting and would be a negation of those principles which are the very bedrock of financial accounting. This is the rationale of management accounting and has led to its emergence.

Management accounting reports often focus on sub-units within an organization, such as departments, divisions, geographical regions, or product lines based on a combination of historical data, estimates, and projections of future events. The financial accounting reports, on the other hand, focus on the enterprise in its entirety and are based almost exclusively on historical transaction data.

Read: Management Accounting Needs for Economic Information – Internal & External Users

The distinctions between financial accounting and management accounting can be drawn in the following parameters:

1. Subject matter:

In financial accounting, the enterprise as a whole is dealt with, while in management accounting attention is directed towards various parts of the enterprise, which is regarded mainly as a combination of these segments.

2. Nature:

Financial accounting is concerned almost exclusively with historical records whereas management accounting is concerned with future plans and policies. Management’s interest in the past is only to the extent that it will be of assistance in influencing the company’s future.

3. Information dispatch:

Since up-to-date information is absolutely essential for management action, there is more emphasis on furnishing information quickly in case of management accounting than in the case of financial accounting.

4. Type of data used:

Financial accounting uses historical, quantitative, and monetary data. Management accounting uses data, that is descriptive, statistical, and subjective and relates to the future.

5. Characteristics:

Financial accounting places stress on those equalities in information, which can command universal confidence like objectivity, validity, etc. Management accounting emphasizes those characteristics, which enhance the value of information in its variety of uses, like flexibility, comparability, etc.

6. Precision:

There is less emphasis on precision in management accounting because approximations are often as useful as figures worked out accurately.

7. Outside dictates:

Financial accounting is standardized and is meant for external use. Thus, outside agencies have laid down certain standards for ensuring the integrity of information processed and presented in financial accounting statements. In case of management accounting, management is both the initiator and the user of data. Thus, management accounting can be smoothly adapted to the changing needs of the management.

8. Elements of compulsion:

These days, for every business, financial accounting has become more or less compulsory but a business is free to install, or not to install, a system management accounting.

Differences between financial accounting and management accounting are as follows:

Bases of Difference	Financial Accounting	Management Accounting
1. Meaning	Financial accounting is a branch of accounting, which provides information to stockholders, creditors, and others who are outside the organization. It may also be helpful in providing information to accomplish the management process.	Management accounting is a branch of accounting, which provides information for managers inside an organization who direct and control its operations.
2. Reporting	It is concerned with reports prepared to those outside the organization.	It is concerned with information for the internal use of management.
3. Functions	It summarizes the financial consequences of past activities and diagnoses the past activities.	It emphasized the future for the formulation of plans and implementation.
4. Emphasis	It emphasizes the precision and verifiability of the data.	It emphasizes the relevance and flexibility of data.
5. Scope	It summarizes data for the entire organization.	It emphasizes the segments of an organization rather than the organization as a whole.
6. Money Measurement	It follows the money measurement concept.	It places more emphasis on non-monetary data and timeliness and puts less emphasis on precision.
7. GAAP’s	It must follow GAAP since the reports are made to outsiders and are audited.	It is not governed by GAAP since the reports, plans, programs, policies are not published to outsiders.
8. Compulsion	It is mandatory by the law and required for publicly held companies and by lenders.	It is not required by external regulatory bodies or by lenders.

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