Financial accounting versus management accounting: Highlighting the differences

Management accounting is geared towards internal users, especially managers at different levels.
Management accounting is geared towards internal users, especially managers at different levels.
Financial accounting is geared towards external users, like shareholders for example.
Financial accounting is geared towards external users, like shareholders for example.

Management accounting and financial accounting are two primary branches of the accounting field. The distinction between the two is not immediately apparent in the names, but there are essential differences between them that are related to their formats, users and purpose. As such, there are six major differences between the two spheres of accounting.

Purpose

Financial accounting states the financial position of entities and provides information about their revenue generation, profitability and other information to stakeholders. It produces information primarily for external information users – primarily finance regulators, the government and owners of the entity. Management accounting provides information for internal users. Internal managers are primary users of this information, as they use it to help with their functions – mainly planning, decision-making and control.

Legal requirement

Management accounting is not legally required; it is used solely at the discretion of an organization's managers. External stakeholders do not normally view this information. Financial accounts are produced for external users, and there is a legal requirement for this in the case of limited liability companies. However, one should note that lenders and suppliers may be interested in the financial accounts of all businesses.

Format and standards

The formats of management accounts are solely at the discretion of internal users. However, financial reports must conform to International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS). Financial reports are more standardized, while management accounting formats are more ad hoc and can vary widely within and among organizations.

Scope

Financial accounts are highly summarized, representing an “aggregate of entities, activities and operations for the whole organization, including any subsidiaries.” The focus of management accounts is much narrower, dealing with specific activities, cost centres, sections or departments.

Content

Financial reports deal almost exclusively with financial information; the majority of information in a financial report is monetary (has a dollar value). Management accounts utilize both monetary and non-monetary measures – financial and non-financial information. Management accounting would be concerned with inventory levels, whereas financial accounting would be focused on the valuation of inventory. If data cannot be monetized, it most likely would not be included in financial statements.

Period covered

Financial accounts are strictly historical representations of an organization's operations for an accounting period. Management accounts have a wider scope as far as period, covering the past, present and even the future. This is because it is also used for planning and forecasting.

Conclusion

The differences between financial and management accounting are not merely academic. These distinctions are significant to management and accountants. Information is produced to satisfy the needs of its internal and external users of an entity, and the two branches of accounting take this into account.

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Comments 3 comments

puddingicecream profile image

puddingicecream 5 years ago from United States

This is a very informative hub. Thanks for clarifying the differences in such a simple and clean way. Voted up for useful!


SpiffyD profile image

SpiffyD 5 years ago from The Caribbean Author

Thanks for the read and comment pudding!


ustad profile image

ustad 4 years ago from Pakistan

Another good hub.

Another difference lies in time within which information to be reported.

Timeliness of external financial reporting is governed by law, where as no time restriction to report in respect of management accounting reports.

Late issuance of financial statements to its users may have seriously adverse effects on the users.

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