Accounting has two branches: financial accounting and management accounting. Financial accounting gives diverse stakeholders an accurate and fair picture of a company’s financial status.
On the other hand, management accounting strives to give managers both qualitative and quantitative data to assist them in making choices and so optimize profitability. This sample aims to help you grasp the key differences between financial and managerial accounting.
Basis for comparison
Financial accounting focuses on the preparation of an organization’s financial statements to provide financial information to stakeholders.
The accounting system that provides managers with relevant information to develop policies, plans, and strategies for the effective conduct of business is called management accounting.
Is it necessary?
Only monetary information.
Monetary and non-monetary information
Provide financial information to outsiders.
To assist management in planning and decision-making by providing detailed information on various issues.
The financial statements are organized at the end of the reporting period, which is usually one year.
Reports are prepared in conformity with the needs and requirements of the organization.
Internal and external sides
Only internal control.
Summarized statements of the entity’s financial position
Complete and detailed reports regarding various information.
Publishing and Audit
Required to be published and verified by legal auditors
Neither published nor verified by statutory auditors.
Definition of financial accounting
Financial accounting deals with preparing financial statements for external parties such as creditors, shareholders, investors, suppliers, creditors, and customers. It is the most refined form of accounting in which financial data is appropriately recorded and reported to offer users relevant and vital information.
Going concerned, materiality, comparison, implementation, conservatism, consistency, accrual, historical costs, and other assumptions, concepts, and conventions underpin financial accounting. The balance sheet and income statement comprise the financial information. Cash flow statements are created in compliance with the relevant law’s criteria.
Financial accounting reports are typically generated for one reporting year so that the user can analyze the company’s financial status, profitability, and performance over time. Internal management, as well as external stakeholders, receives information for forecasting, planning, and decision-making.
Definition of management accounting
Management accounting, often known as management accounting, is accounting for managers that aids in formulating policies and the prediction, planning, and control of an organization’s day-to-day business activities. Management accounting collects and analyses both quantitative and qualitative data.
Management accounting isn’t just about giving financial or cost information. Instead, it takes pertinent and material data from economic and cost accounting to aid management in budgeting, goal-setting, and decision-making, among other things. Accounting can be done on a weekly, monthly, quarterly, or annual basis, and there is no specific format in which it should be recorded.
Critical Differences Between Financial Accounting and Management Accounting
The following principles clarify the critical distinctions between financial and managerial accounting:
- Financial accounting is the division of accounting that keeps track of an organization’s financial data. Management accounting is the domain of accounting that records and reports an organization’s financial and non-financial data.
- Financial accounting is used by both the company’s internal management and external parties, whereas the company’s internal management only uses management accounting.
- Financial accounting must be disclosed to the public, whereas management accounting is intended for internal use and kept private.
- The financial statements only contain financial information. On the other hand, management accounting includes both monetary and non-monetary data such as the number of employees, the number of raw materials used and sold, etc.
- Financial accounting follows a predetermined format, whereas Management Accounting does not.
- Financial accounting is concerned with providing customers with information about how a company’s business operates. In contrast, management accounting is concerned with providing information to help them evaluate performance and plan for the future.
- Most financial accounting is recorded for a specific period, usually one year. On the other hand, management accounting is kept according to the needs of the management, such as quarterly, semi-annually, or annually.
- For auditing purposes, financial accounting is required for any organization. On the other hand, management accounting is optional because there is no editing involved.
- Statutory auditors must audit and report financial accounting information, unlike management accounting, which does not require data to be published or audited because it is solely used internally.