Top Differences between Management & Financial Accounting

August 9, 2022
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Financial Accounting vs Management Accounting

After finishing a monetary accounting course, many students dread another semester of debit entries, credits, and reflective diaries. Fortunately, management accounting is not the same as monetary accounting. Managerial accounting, also known as cost accounting or management accounting, gives information to managers and other customers inside a company to help them make better decisions. The distinction between monetary/financial and management accounting stems from managers’ overriding tasks (planning, controlling, and assessing).

Table of Content

Key Abstract
Meaning of Financial Accounting
Objectives of Financial Accounting
Meaning of Management Accounting
Applicability of Management Accounting
Functions of Management Accounting
Financial Accounting vs. Management Accounting
Takeaway

Key Abstract

The distinction between financial and managerial accounting is a key subject to understand because the two phrases are distinct. Financial accounting and management accounting are both significant accounting disciplines. Financial accounting is to provide accurate information to stakeholders, allowing them to make educated decisions. Management accounting, on the other hand, is secret and confined to the company’s management, and it is used by management to improve the efficiency and effectiveness of the organization’s operations.

Financial accounting and management accounting are sometimes used interchangeably, but they are not the same, and their functions and scope differ even if they are connected. Apart from financial accounting data, management accounting employs other economic and financial principles. Thus, financial accounting is primarily concerned with presenting a company’s financial health to its owners and creditors. Management accounting, on the other hand, is focused on educating senior management about the health of the organization and making improvements.

Before we shall move on to discuss Top Differences between Management & Financial Accounting, let us shall discuss Management Accounting and Financial Accounting respectively.

Meaning of Financial Accounting

The purest form of accounting is financial accounting. It deals with accurate record keeping, financial statement production, and financial data reporting to offer relevant information to its consumers. It is founded on:

Assumptions in Accounting
Accounting Fundamentals
Accounting Practices

The financial accounts are produced by Schedule III of the Companies Act, 2013. Traditionally, financial accounting seeks to determine information about an organization’s performance, profitability, and position based on the commercial operations done. However, with the aid of a financial statement, information about cash flows and earnings per share is now also presented.

Objectives of Financial Accounting

The primary goal of financial accounting is to determine the results of business operations in terms of profit or loss for the period. It also provides information on the company’s financial position on the last day of the accounting period. Also:

Its goal is to record financial activities in accounts in a systematic manner so that financial statements may be prepared more easily.
It entails creating financial statements such as a balance sheet, income statement, and cash flow statement. It highlights the results of business operations for the relevant accounting period as well as the financial condition on that date.
Shareholders (both current and future), labor unions, creditors, financial experts, government agencies, and others may use financial statements.

Meaning of Management Accounting

Management accounting is also known as managerial accounting. Accounting for managers assists management in developing policies, forecasting, planning, and regulating deviations.

It collects and analyses both quantitative and qualitative data. Management reports can be prepared in any easy and clear style. For a better presentation, it can incorporate tables, charts, graphs, and so forth.

Simply described, management accounting is the process of preparing management reports and accounts to give managers with accurate and timely information for decision-making. Furthermore, these reports can be created on a daily, weekly, monthly, or yearly basis, depending on the needs of the management. There is no standard format by which it should be reported.

Applicability of Management Accounting

Management accounting is concerned with the utilization of accounting data gathered through various accounting procedures for goals such as:

Policy development
Planning
Management is in charge of controlling and making decisions.

Functions of Management Accounting

Management accounting’s functional area is not restricted to the providing of financial or cost information; rather, it collects useful information from many activities conducted during the course of business to support management in budgeting, goal planning, decision making, and so on.

It entails providing information to management in order for them to properly carry out their managerial obligations and activities.
It provides historical and estimated data to the company’s management for performance assessment and control, as well as planning future operations.

Financial Accounting vs. Management Accounting

Although there are clear variations between financial and management accounting, they share comparable approaches and applications, particularly when it comes to accounting regulations, compliances, and stakeholders or targeted audiences. The major purpose of management accounting is to create relevant and useful information for a company’s internal usage, according to finance and accounting professionals. Managers collect data in order to better strategic planning and create feasible goals. Financial accounting is important internally, but it is mostly required by external stakeholders since it discloses a company’s financial health and performance.

Although financial and managerial accounting appears to be equivalent and perform almost the same function, there are substantial differences. The following are some of the differences between financial and managerial accounting, as well as what sets them apart. Accounting software is also useful in both accounting principles, which is advantageous to any small, medium, or big company.

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 maintenance requirement, 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 is 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.
The nature of Input Information	Information required for financial accounting statements is financial.	Both financial and non-financial information is utilized in preparing management accounting reports.

Takeaway

Financial accounting and management accounting have quite different intended consumers of information. Financial accounting delivers financial data to outside parties; whereas managerial accounting provides vital information to assist managers to make better-educated business choices within the organization. Financial accounting must follow specific criteria established by GAAP, which is required for businesses based in the United States to maintain their publicly listed status. Managerial accounting is not intended for many stakeholders and can be tailored to the needs of the company.

Feel free to connect to our Experts at Legal Window, if you want to gain some more knowledge about the Financial and Management Accounting.

CA Pulkit Goyal (B.COM, FCA)

CA Pulkit Goyal, is a fellow member of the Institute of Chartered Accountants of India (ICAI) having 10 years of experience in the profession of Chartered Accountancy and thorough understanding of the corporate as well as non-corporate entities taxation system. His core area of practice is foreign company taxation which has given him an edge in analytical thinking & executing assignments with a unique perspective. He has worked as a consultant with professionally managed corporates. He has experience of writing in different areas and keep at pace with the latest changes and analyze the different implications of various provisions of the act.

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