You can’t deny the role of an accountant in the financial success of your business. Financial accounting and management accounting belong to two of the largest divisions of accounting. The students of accounting or business must know that there are differences between these two types of accounting, and the rest who don’t know for them we are here. Because we’ll discuss the difference between financial accounting and management accounting here in this article.
What is Financial Accounting and Management Accounting?
Financial accounting is the main type of accounting that entails recording business transactions, preparing reports such as income statements, balance sheets, cash flow statements, and the like summarizing all information. These reports are then presented before external users such as industry regulators, shareholders, and investors so that they can take financial decisions rationally. In simple words, financial accounting discusses the financial aspects of accounting.
Conversely, management accounting is a modern branch of accounting that discusses the managerial aspects of accounting. Management accounting gives and analyzes cost-related information to the internal management that helps them to make plans, control business, and make decisions. Where financial accounting gives only quantitative information to the external users of the business so that they can have a clear idea about the financial condition of the business; there management accounting gives both quantitative and qualitative information to the internal management so that they can make the right decision and increase the business profit.
You have got some idea regarding the differences between these two types of accounting from the brief discussion above. Now, let’s discuss more thoroughly.
Financial Accounting vs. Management Accounting: Main Differences
| Points of Distinction | Financial Accounting | Management Accounting |
| 1. Definition | Financial accounting is the main type of accounting that entails recording business transactions, preparing reports such as income statements, balance sheets, cash flow statements, and the like summarizing all information. | Management accounting gives and analyzes cost-related information to the internal management that helps them to make plans, control business, and make decisions. |
| 2. Goal | The main goal of financial accounting is to express a business’s final results and financial position. | The main goal of management accounting is to help the management by giving information that is mainly used for planning, setting goals, and analyzing these goals. |
| 3. User | Mainly external users such as industry regulators, shareholders, and investors use the information that financial accounting generates. But internal users also use it. | Managers and employees inside a company or organization use the information that management accounting creates. |
| 4. Concentration | Financial accounting concentrates on history and reports previous quarters or years. | Management accounting concentrates on the present and forecasts the future. |
| 5. Legal Requirement | Preparing financial accounting reports is legally required. | Management accounting reports are not legally required. |
| 6. Type of Prepared Statements | Common-purpose financial statement. | Specific-purpose financial statement. |
| 7. Segment Reporting | Reports are used in the entire organization. But some particular figures are separately used for some specific business divisions. | Used in the whole organization apart from separate divisions. |
| 8.Rules | Follows GAAP or Generally Accepted Accounting Principles. | No specific rule is followed. |
| 9. Reports on Which Aspect? | Only financial aspects. | Both financial and non-financial aspects. |
| 10. Period | Financial accounting statements are prepared for specific periods such as annually, semi-annually, quarterly, and the like. | Prepared when required such as on a daily, weekly, or monthly basis. |
| 11. Format | Financial accounting reports follow a specific format. So, you can easily differentiate among various organizations. | An unspecific format that is prepared based on different divisions or organizations according to requirements. |
| 12. Publishing and Auditing | Statutory auditors need to publish and audit it. | It’s not needed to be published or audited because it’s only for internal use. |
| 13. Data | Gives financial and verifiable data. | Gives financial and business goal-driven data. |
| 14. Scope | Financial accounting’s scope is quite large because it observes the entire business. | Management accounting’s scope is small because it observes different divisions of the business. |
| 15. Other Name | Financial accounting is known only by this name. | Managerial accounting is another name for management accounting. |
| 16. Compulsory/Optional | Preparing financial accounting reports or statements | Managerial accounting is voluntary/optional. |
Similarities between these Two Types of Accounting
Activities of Financial Accounting
Despite the differences, financial accounting and management accounting have some similarities. Such as:
1. Both are parts of the fundamental accounting system.
2. Both of these accounting keep track of economic events
3. You will need the same database to generate the reports.
4. Motive of both is to convert the economic transactions and function’s outcomes into figures.
5. Both of this accounting analyze a company’s or organization’s or business’s position and performance.
Activities of financial accounting are as follows:
Systematically Recording
A large business has numerous business transactions, and keeping all those in your mind is quite a tough thing. So, these should be recorded chronologically and systematically according to the generally accepted accounting principles and government rules.
Ensuring Validity, as well as, Authenticity
As financial accounting follows GAAP, so each entry that you will use in the statements or reports will add not only validity but also authenticity.
Analyzing and Summarizing
After recording all data systematically, prepares different statements and reports, then takes the data from there analyzes that such as ratio analysis, horizontal analysis, vertical analysis, and the like and summarizes that.
Communicating Business-related Information
Communicates business-related information to external users of the business such as investors, shareholders, and the like.
Interpreting the Financial Situation of a Business Organization
Financial accounting prepares various statements and reports that give a clear idea regarding a business firm’s financial condition to investors, shareholders, and industry regulators.
Meeting Legal Requirements
The financial accounting team needs to meet legal requirements such as auditing with external auditors for a specific financial year and paying tax liabilities according to the country’s law and system.
Activities of Management Accounting
The main activities of management accounting are as follows:
Supplying Information
Management accounting works as the main source of information to help the managers of a business or the management to make decisions.
Modifying Information
Management accounting classifies and compiles data to facilitate management’s decision-making.
Analyzing and Interpreting Data
Does important and helpful analysis of information to help in fruitful planning and decision-making. Your business information needs to be presented in an analytical format for this. For this purpose, management accounting set some trends and also calculates some ratios.
Giving Qualitative Information
Management accounting doesn’t give only financial data to managers to help them in decision-making, instead, it includes those data that can be measured financially to understand a company’s performance better.
Expressing a Business’s or Company’s Performance
Management accounting works as a medium to express a business’s or company’s performance through planning, forecasting, and trends.
Final Words:
Hope that you have understood the difference between financial accounting and management accounting clearly from the above discussion. You can use the HishabPati app to strengthen the financial accounting and management accounting system of your business, which you can use for free or in affordable packages. HishabPati app Can be used free or in a nominal price.
All the best!
