Understanding the Difference Between Financial and Management Accounting
As businesses grow, it becomes necessary to have an accurate record of financial transactions, and this is where accounting comes in. Accounting handles financial issues and ensures that the books are kept correctly. But one thing that confuses many people is the difference between financial accounting and management accounting. In this article, we will outline the dissimilarities between the two and why they are critical for businesses.
Financial Accounting
Financial accounting is concerned with providing information about the financial health of a business. The primary purpose of financial accounting is to produce financial statements that can be used by external stakeholders to make decisions. These statements are summarized at the end of each accounting period and contain the balance sheet, income statement, and cash flow statement.
Financial accounting is regulated by accounting standards, such as Generally Accepted Accounting Principles (GAAP), International Financial Reporting Standards (IFRS), and Securities and Exchange Commission (SEC) rules. These standards ensure that financial statements are relevant, reliable, and comparable across different organizations.
Management Accounting
Management accounting, on the other hand, is concerned with providing private information to internal stakeholders such as managers and owners. Management accounting helps in making operational and strategic decisions by providing detailed financial information that is tailored to the specific needs of the organization.
Management accounting information is more detailed and timely than financial accounting information. It is not regulated by accounting standards and can be customized to the user’s needs. The information provided through management accounting includes budgets, forecasts, cost-benefit analysis, and key performance indicators.
The Key Differences
The critical differences between financial and management accounting are:
– The primary users of financial accounting information are external stakeholders such as shareholders, investors, and creditors, while users of management accounting are internal stakeholders such as managers and owners.
– Financial accounting is regulated by accounting standards, while management accounting is not.
– Financial accounting is concerned with providing information about the financial health of the business, while management accounting provides detailed financial information that helps in making operational and strategic decisions.
– Financial accounting focuses on the past, while management accounting focuses on the future.
Conclusion
In conclusion, financial accounting and management accounting differ in their purposes, users, regulation, and the type of information provided. Both forms of accounting are essential for businesses, and companies that use them well are more likely to make informed decisions that improve profits and financial stability. Understanding the difference between the two is critical for businesses to create a financial strategy that optimizes their financial performance.
Table difference between financial and management accounting
| Financial Accounting | Management Accounting |
|---|---|
| Deals with external stakeholders such as investors, creditors, and regulatory bodies. | Deals with internal stakeholders such as managers, executives and employees. |
| Focuses on past financial performance of the company. | Focuses on future financial performance of the company. |
| Presents financial statements such as income statement, balance sheet, and cash flow statement. | Creates bespoke reports and analysis to aid decision making. |
| Follows strict accounting standards such as GAAP or IFRS. | No strict standards are followed. |
| Provides a summary of all financial transactions. | Provides detailed information about specific areas of the business. |
| Used by creditors, investors, and other external stakeholders to assess the financial health of the company. | Used by managers to make strategic decisions and control the company’s operations. |