Financial Accounting vs Management Accounting: The Basic Difference.

Management Accounting is an internal reporting system concerned with the provision of information for the use of people within the organization to enable informed decisions thereby enhancing performance and efficiency of the entity. It provides information for planning, budgeting, control, measurement, and performance evaluation. Financial accounting, on the other hand, is the process of capturing, collating, recording, sorting, classifying, reporting, and presenting financial transactions to generate financial statements in compliance with regulatory requirement and for stewardship.

This article is concerned with basic differences between management accounting and financial accounting. Notable differences between management and financial accounting is as highlighted below:

• Management accounting is optional while financial accounting is a legal requirement;
• Management accounting reports on a segment of the business while financial accounting reports cover the entire business;
• Management accounting does not follow a particular rule whereas financial accounting follows Generally Accepted Accounting Principles, IPSAS, IFRS.
• Management accounting focuses on the future for forecasting while financial accounting is historical in nature because it looks at the past to examine financial results that have already been achieved;
• Since management needs information often to make decisions, management accounting reports may be daily, weekly, monthly, quarterly or as the need arises. However, financial accounting report is published bi-annually and annually;
• Financial accounting only cares about generating a profit. Conversely, managerial accounting looks for bottlenecks in operations, and examines various ways to enhance profits by eliminating bottlenecks;
• The internal people within the business are the user of management accounting information. Such users include top management, managers, and employees. Users of financial statements are predominantly external e.g. analysts, investors, shareholders, tax authority, the general public etc.;
• Managerial accounting focuses on internal processing used to account for business operations while financial accounting is the collection of financial data;
• Financial accounting looks at the entire business as a whole while managerial accounting reports at a more detailed level. MA focuses on detailed reports like profits by product, product line, customer and geographic region;
• A business’ profitability and efficiency are reported through financial accounting. Managerial accounting reports on what is causing a problem and how to fix that problem;
• Considerable precision is needed to prove that financial records are correct. Financial accounting relies on this accurate data for reporting, while managerial accounting frequently deals with estimates;
• Financial accounting is concerned with proper value of a company’s assets and liabilities. Managerial accounting deals with the value these items have on a company’s productivity;
• Managerial accounting reports are shared internally only and are, therefore, not subject to such rules and regulations and are not required by laws to follow any accounting standard; and
• Financial accounting is concerned with giving true and fair view of the financial position while management accounting deals with provision of quantitative and qualitative information to the managers of the business;

Finally, financial accounting presents financial transactions with the reports distributed inside and outside of a business and are governed by accounting standards, GAAP and IFRS. The external publication of financial statement makes it very necessary to follow regulation to provide correct information. Management accounting reports detailed analysis of business process and it is for management consumption for the purpose of making informed decisions.