Difference Between Financial Accounting vs Management Accounting
What comes to your mind when you think about the term “Accounting”?
Well, for most of the people what generally strikes is money, and how to account for such money. Accounting is one of the subjects in the main Commerce stream which gives a detailed view of the movement of money. In different currencies depending upon the location where it is studied, this subject lets us know how we can report our income, expenses, investments, assets and other transactions. Accounting is a very important practice since proper accounting of transactions can be helpful in understanding the future prospects, risks and returns on investments, how well we are managing our expenses and what profits are we making. As and when the accounting is done, reporting such transactions is equally important. Now, reporting can be either on a granular and internal level (Management Accounting) or on a higher and public level (Financial Accounting).
Financial Accounting vs Management Accounting are sub-streams of the main Accounting vertical.
Financial Accounting, as the name goes, deals with reporting of finances of a company for public use. Management Accounting refers to reporting financial data for the internal purpose and is mainly used for the higher management.
Financial Accounting vs Management Accounting Infographics
Below is the top 9 difference between Financial Accounting vs Management Accounting
How are Financial Accounting vs Management Accounting similar?
There are, obviously, certain similarities between Financial Accounting vs Management Accounting – let us have a look at the key difference between Financial Accounting and Management Accounting:
- Both, Financial Accounting vs Management Accounting are a part of the main Accounting stream.
- Both these sub-streams follow the same rules and principles of accounting. They have the same effects given to Debits/Credits, Assets/Liabilities, Income/Expense; both follow the same Chart of accounts, etc.
- The origin to both the types of accounting should be the same assuming they are both to be applied in a particular situation. In other words, they would both refer to common starting points like Gross Sales, Total Investments, etc., for reaching an end result. Moreover, they may also have the same origins in the company’s accounting system.
- Both Financial Accounting vs Management Accounting are aimed to report numbers that will be used for the betterment of the future prospects. Reporting may be a little different in both types of accounting, but the end numbers are indicative of growth (or lack of growth) of the company, and hence management may take appropriate decisions to gear up the progress accordingly.
Financial Accounting vs Management Accounting – Comparison Table
Being a part of the same stream, they have been differently created for a few reasons, which brings in some difference between Financial Accounting and Management Accounting. Let’s have a look at the Comparison between Financial Accounting vs Management Accounting:
| Financial Accounting | Management Accounting |
| Reporting made for public view; all amounts, facts, and figures are disclosed publicly. | For a company’s internal purpose – hence the name. Facts and figures are confidential o management teams and other decision-making individuals. |
| Follow universal reporting standards of Accounting like IFRS or US GAAP, which are easily understood by other individuals versed with these. | Do not have a set pattern or format or reporting. Figures are reported as per the target audience, and hence may or may not include information as per their requirement. |
| Generally, tend to aim only at a company’s financial data. | Can include both financial as well as non-financial data in reports as per the requirement. |
| Reports are first audited and then published or reported. | No formal audit structure required for such reporting. |
| Facts and figures are supposed to be accurate, as they are sensitive information. | Generally, figures used are estimates, which are used for future planning, budgeting, and forecasting. |
| Reporting is made at the end of a certain period (usually done annually, after the end of financial year closing). | Reporting is done more frequently than a year since the information is used for the betterment of decisions made for future plans. |
| A target audience is an entire world, since these are reported centrally to a global or regional body, and which information can be made public. | A target audience is a very small group as compared to the reporting for Financial Accounts. Generally, such reports are discussed in small meetings within the higher management, or amongst decision makers for a particular project. |
| Reports are used in company analysis – to understand the performance of the company in the past and to try to analyze from different statements about how it is planning to use its funds in the future. | Reports are used for decision making within the company, for the acceptance/rejection of projects, resource allocation, procurement-related decisions etc. |
| The facts and figures reported areas of a particular date in the past. | In the Management Accounting, facts and figures that are reported are real time. |
Conclusion – Financial Accounting vs Management Accounting
In this Financial Accounting vs Management Accounting article, we have seen financial accounting and management accounting also referred to as Financial and Management Reporting respectively, are both beneficial for a company’s progress.
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Management Reporting works at a more granular level and provides the decision makers with an insight of where the projects and processes of the company stand at any given point in time. It helps them to take better decisions within available time, to take things under their control. It also suggests better ways to reach the required goals. Sometimes, these reports are confidential and are made available only on a need-to-know basis to people.
Similarly, Financial Reporting is a standard requirement for all audited companies to follow. A company’s performance can be measured by the reports published by such reporting system. The standard statements published by the company annually or semi-annually are used by analysts and economists to understand the growth of such a company. It also reflects the management performance during the previous year. Based on the analysis made by such analysts and economists, investors make their decisions either to invest in these companies or not.
Thus, from a company’s perspective, neither of this reporting can be missed, however, from an analyst’s perspective, it is very important to use proper tools to understand and analyze the reports in order to make the right decisions.
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