The difference between financial accounting and management accounting is as follows. Financial accounting intends to disclose the right information to the stakeholders so that they can make informed decisions. Whereas the management accounting is confidential and limited to the management of the company and it is utilized by management in bringing efficiency and effectiveness in the organization’s working.
Financial accounting and management accounting is used synonymously but, they are different from each other. Their function and scope are different even though, they are related to each other. Management accounting uses financial accounting data apart from using other economic and finance principles. Thus, the focus of financial accounting is mainly disclosure whereas management accounting is concerned with informing the top management about the health of the business and suggesting improvements.
Difference between financial accounting 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. Hence, it is mainly aimed at assisting investors in making informed decisions. | Here, the aim is different than financial accounting. Generally, management accounting information is meant for management to make informed business decisions. |
Regulatory Requirements | It is a mandatory requirement for every public organization by the government. Thus, 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, institutes like CIMA, ICWAI, etc provide some framework 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 same features. | There is no standard basis for preparing management accounting statements. Hence, they are prepared based on the requirement of the management team. |
Time Horizon | The 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 the 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, and 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. Hence, everything has evidence to support it. | Data of management accounting is not necessarily 100% verifiable. So, 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. But, 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 the 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 the whole business and it is an end in itself. Thus, Some accounting standards in some countries bind the companies to do segment reporting in defined formats. | On the other hand, 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. |
Nature of Information Input | Information required for financial accounting statements is financial in nature. | Both, financial and non-financial information is utilized in the preparation of management accounting reports. |
Wonderful lecture at its best.