Difference between Financial and Management Accounting

The difference between financial and management accounting is an important concept to study since both terms are different. Both Financial accounting and management accounting are important branches of accounting. Financial accounting intends to disclose the correct information to the stakeholders, enabling them to make informed decisions. At the same time, management accounting is confidential and limited to the company’s management, and it is utilized by management in bringing efficiency and effectiveness to the organization’s work.

Financial accounting and management accounting are used synonymously, but they are different, and their function and scope are different even though they are related to each other. Management accounting uses other economic and finance principles apart from using financial accounting data. Thus, financial accounting focuses mainly on disclosing its financial health to its shareholders and creditors. In contrast, management accounting is concerned with informing the top management about the health of the business and suggesting improvements.

Difference between Management and Financial Accounting

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 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 are 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.

Nature of Input Information

Information required for financial accounting statements is financial in nature. Both financial and non-financial information is utilized in preparing management accounting reports.

Also read – Cost Accounting and Management Accounting

Frequently Asked Questions(FAQs)

1. Which of the following is a characteristic of managerial accounting?
A. It is not mandatory by any statutory authority.
B. MA statements are for internal use by management.
C. It has no specific time horizon.
D. All of these.

D. All of these.

2. What is the principal reason for preparing managerial accounting reports?

The principal reason for preparing managerial accounting reports is to inform the management about the health of the business and suggests improvements to make informed decisions.

3. Who are the external users of accounting information?

Following are the external users of accounting information:
a) Suppliers.
b) Customers
c) Shareholders.
d) Government.
e) Banks.
f) Investors

4. Which of the following statements does not describe a characteristic of management accounting?
A. There is no specific requirement for an independent audit.
B. Management accounting statements are required for public use only.
C. It uses both financial and non-financial information.

B. Management accounting statements are required for public use only.



Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

7 thoughts on “Difference between Financial and Management Accounting”

  1. This blog post still appears on Google top 10 when you search “Differences between Management Accounting and Financial Accounting”. Don’t you think “Profit and loss account” in number 6 should be changed to “Statement of Comprehensive Income” and “Balance sheet” to “Statement of Financial Position”
    Thanks.

    Reply
  2. I am new to the field of accounting and the information shared here helped me get a clear difference between these two concepts.
    Thank you

    Reply

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