Financial Accounting vs. Management Accounting
This has been an aspect of curiosity for many since long. Except for your accountant, no one would probably know the demarcation between financial and management accounting. It is important however for every business owner or leader to know this difference so that they are able to demand and expect meaningful reporting from their accountants.
So let’s broadly understand the difference between the two branches of accounting discipline. To put it simply, financial accounting is the compilation of financial transactions to generate financial statements, whereas management accounting is the detailed accounting of internal processes be it sales, production, administration, personnel etc. in order to innovate management reports that help decisive decision making towards improvement of business processes. Management accounting however is dependent on accurate financial accounting and also has to be planned upfront to be synced with financial accounting such that you are in a position to generate reporting that deciphers the financial transactions to put perspectives on productivity and profitability of different business processes. So let’s understand these further through some simple pointers:
- Scope: Financial accounting is concerned with the deriving the overall business profitability and not focussing specifically on how the business works. Management accounting rather is implemented to identify issues with processes to identify bottlenecks in the operations and using the same to find resolutions that enhance process profitability.
- Audience: Financial accounting is done with the primary objective of generating financial statements not only for internal use but external stakeholders and the public. Managerial accounting rather is limited to a business or company’s internal operational reporting.
- Application: Managerial accounting is applied towards generating detailed reports of costs or profits by products, customer, geography, people etc. Financial accounting is applied to generate status on the business assets and liabilities, expenses and incomes, and profitability at large.
- Reporting period: Financial statements are due for generation at the end of every accounting period, while management reporting could be more frequent, to assist managers/owners on process status financially to help them keep track and take corrective measures in due course of business.
- Accuracy: Financial accounting has be accurate always and cannot include any estimates since financial statements reflect business performance for stakeholders, auditors and public. Management accounting on the contrary can also include estimates, to offer the management with process trajectories or forecasts in order to help them keep an eye on where things are headed. The estimates can dynamically change from time to time to provide for changes in business plans or processes.
- Standards: Management accounting is for a company’s internal use and there are no set of prescribed reporting standards for the same, whereas financial accounting must follow the prescribed standards by the regulators such as the Financial Accounting Standard Board (FASB) or the Securities Exchange Commission (SEC) as they establish financial accounting rules in the United States. Such reporting standards may be different for different countries like the UK, Australia, and India etc.
- Valuation: Financial accounting is objectively used to know proper valuation of a business or company, its assets and liabilities, whereas objective of management accounting is to derive the value, the assets or liabilities in a business bring on the company’s productivity and processes.
Trust these simple pointers have enabled you to understand both financial accounting and management accounting better and enable you to make the most in analysing your business with the help of your accountant. Outsourcing your business accounting to an experienced accounting firm such as CharterCPA, can help you generate management accounting besides conventional financial accounting, as firms like CharterCPA have accounting experts who have exposure to multiple industries and are aware of the industry practices and how a robust financial analysis can be obtained from your business accounts to reflect on the health of your business processes.
Thanks & Regards,
Knowledge Center Team
Your Virtual Accountant