Difference between Financial and Management Accounting

Points of Difference

Financial Accounting

Management Accounting

Aim

The main aim is to provide information to outside parties. Outside parties include creditors, investors, customers etc. It is mainly aimed at assisting investors in taking informed decisions.

Here, the aim is different than financial accounting. Management accounting information is meant for management to take informed business decisions.

Regulatory Requirements

It is a mandatory requirement for every public organization by the government. They are governed by Accounting Standard Boards, companies’ law and government.

It is at the discretion of management. There is no mandatory requirement but still some framework and formats are provided by institute like CIMA, ICWAI etc.

Governing principles

Financial accounting statements are prepared on the basis of ‘Generally Accepted Accounting Principles (GAAP)’. These GAAP are different for different countries with more or less same features.

There is no standard basis of preparing management accounting statements. They are prepared based on the requirement of the management team.

Time Horizon

Time horizon for financial accounting is past. Generally, it is one accounting year.

It has no specific time horizon but the main focus is on future.

Reporting beneficiaries

It is prepared for outside or external parties. External parties like shareholders, suppliers, customer, government, banks etc.

Reports prepared under management accounting are useful to internal parties like CEO, directors, promoters, higher level managers etc.

Outputs

Financial accounting reports consist of profit and loss statements, balance sheet and cash flow statement.

Management accounting reports are the monthly, weekly or yearly analysis of products, geographies, functions etc.

Relevance and Precision of Data

Data of financial accounting are 100% verifiable and precise in nature. Everything has an evidence to support it.

Data of management accounting is not necessarily 100% verifiable. The data should be relevant, timely and logical. For instance, nobody can forecast sales perfectly.

Independent Audit

Independent audit of financial accounting reports is mandatory in most countries. For instance, in the USA, CPA conducts such audits and in India, Chartered Accountants (CA) conducts such audits.

There is no specific requirement for an independent audit. Management, at its discretion, can take the initiative to conduct an independent audit for the sake of efficient and effective management.

Confidentiality

Financial accounting statements are publicly published statements and are meant for public only. So, there is no question of confidentiality.

Management accounting statements are meant for management and confidentiality of the statements is the key concern. It is because they contain business secrets.

Segment Reporting

It is concerned with whole business and it is an end in itself. Some accounting standards in some countries bind the companies to do segment reporting in defined formats.

On the other hand, it is concerned with specific area or segment for their analysis. Segments may be a product line, geography, manufacturing unit, etc.

Perspective

It has historic perspective.

It has futuristic perspective.

Nature of Information Input

Information required for financial accounting statements is financial in nature.

Both financial as well as non-financial information are utilized in the preparation of management accounting reports.