Difference Between Financial & Management Accounting
Accounting as we know it can be separated into two distinct branches. Although both involve heavy analysis and interpretation of performance data, use of assumptions and reporting in some form or fashion, they are very different in terms of approach and ultimate purpose. For starters, one of the two deals with information that is prepared specifically for external users of the economic information pertaining to a company’s ongoing operations (financial accounting) and the other prepared specifically for a corporation’s internal users enabling them to make better operating decisions (management accounting).
Internal users include everyone from entry level employees to the most senior persons in management. Although the spectrum of users is broad, the relevance of the analysis, findings and recommendations resulting from management accounting activities have greater meaning for individuals in a decision making role. Often times the product of the said activities either drive or help evaluate the strategic initiatives of the organization.
Financial accounting on the other hand caters to those who invest in, finance or do business with a corporation. Utilizing standard financial statements like the income statement, balance sheet and statement of cash flows, an interested external party can for the most part thoroughly evaluate the health and economic condition of the overall business.
Aside from intended audience, there are other key differences between the two branches of accounting. They are outlined briefly below.
- View of the business: management accounting provides the flexibility to evaluate the various pieces of the business including its products. Financial accounting is more or less a consolidated view that doesn’t go into specifics.
- Statutory requirements: financial accounting and its end product (i.e. financial statements) are required for publicly traded companies and as a best practice, expected from almost all others. Management accounting on the other hand is done at the discretion of the company’s internal parties. As long as the cost doesn’t outweigh the benefits, evaluating strategic initiatives and operations based on management accounting principles is usually a good idea.
- Forward looking: management accounting is used to look ahead and predict business outcomes with reasonable certainty. Financial accounting on the other hand looks at information after the fact.
- Conformity to standards: In the U.S., publicly traded companies have to adhere to GAAP (Generally Accepted Accounting Principles) for all of their financial accounting activities. The major regulatory body overseeing the financial accounting function is the FASB. Although the IMA (Institute of Management Accountants) has a defined body of knowledge under which management accounting activities are carried out, it is not a requirement for any company. The IMA’s best practices are just that – best practices.
- Information availability: financial statements are published at the end of the accounting period (audited) and periodic interim statements (quarterly) are usually provided by companies as well (unaudited). The unaudited reports of course have to give reasonable indications of what performance will likely be at the end of the accounting period. Unlike financial accounting, management accounting information may be required by a company more frequently and often times the exercise is ad-hoc in nature.