Financial accounting versus management accounting: Highlighting the differences
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.
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.
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.
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.
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.
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.
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.