Financial Accounting VS Management Accounting
The difference between financial accounting and management accounting is very important to understand as both of them serve different purposes and audiences.
A person from the management may not find certain information relevant, and at the same time, a cost accountant can’t work without this information. A creditor and a manager would need different sets of information from the accounting records of a business.
Financial Accounting
- It is a branch of accounting, which deals with classifying, measuring and recording a business transaction. Financial accounting is concerned with the preparation of financial statements for the purpose of demonstrating the performance and position of a business. The end products are P&L Account for the period end and Balance Sheet as on the last day of the accounting period.
- It is mainly concerned with “External users of information” such as Shareholders, Government, Lenders, Public and other users of accounting information.
- It focuses on historical data and helps in reporting done on quarterly, annually, etc. basis.
- Example: Suppose a Bank wants to decide whether to extend credit to a firm. It will need to look into the business’ financial accounting data such as financial statements.
Related Topic – Difference Between Cost and Management Accounting
Management Accounting
- It helps in effective performance management, control, planning, decision-making, etc. It generally includes budgeting decisions as well. Since management accounting is not a legal requirement, it is not based on Generally Accepted Accounting Principles and accounting standards.
- It is a branch of accounting, which is mainly concerned with “Internal users of information” – commonly, managers. Management accounting provides a basis for internal users to make a logical and informed decision.
- It focuses on the present and future and there is no set reporting schedule.
- Example: Let’s say that a Sr. Manager wants to make an internal decision on an investment made in a particular business segment. It will need internal management accounting data such as the return on investment, etc.
The above information presents a few key points of difference between financial accounting and management accounting.
Short Quiz for Self-Evaluation
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