Accounting is often divided into two categories: financial accounting and management accounting.
Financial accounting information is designed primarily for use by persons outside the firm, including creditors, stockholders, owners, governmental agencies, and the general public.
Most companies publish financial accounting data through a set of general-purpose statements known as the company’s annual reports. These statements provide most of the information needed by external users.
The specialized needs of specific users are satisfied through supplementary reports, which are published at various intervals (e.g., annually or quarterly).
Financial accounting provides information that covers relatively long periods of time. In addition, financial accounting information is historical in nature, where financial accounting reports concentrate principally on the results of past decisions.
Financial accounting is governed by generally accepted accounting principles (GAAP). These principles are subject to ever-changing rules and regulations, as well as disputed interpretations.
Financial accounting reports are developed from the basic accounting system, which is designed to highlight data about completed transactions.
Management accounting is primarily concerned with the managers of a company and the provision of useful information intended for internal use.
Managers gather management accounting data and analyze, process, interpret, and communicate the results so that the information can be used to promote sound internal decision-making.
The types of decision-making that management accounting is used to inform include financial decisions, marketing decisions, production decisions, resource allocation decisions, and so on.
Management accounting helps different departments in an organization to work in a coordinated manner. This is because it acts as a communication link between the departments.
Managerial accounting reports are usually designed for a specific decision and provide information for relatively short periods of time. They are not governed by any set of principles and are not required by law.
Since management accounting is not required by law, the reports prepared by management accountants are subject to cost-benefit analysis (i.e., the perceived benefits of the report should exceed the costs).
Also, since no external standards are imposed on information provided to internal users, management accounting reports run the risk of being subjective.
Comparison of Financial and Management Accounting
Both management and financial accounting deal with economic events. Furthermore, both are concerned with revenue, expenses, assets, liabilities, and flows of cash. Also, both require quantifying the results of the organization’s economic activity.
In actual practice, it is difficult to classify information as being either exclusively financial or managerial. The two accounting systems are part of the total business system and, for this reason, they normally overlap.
For example, much of the future planning data associated with managerial accounting is based on the historical information that is retained for financial accounting purposes.
Differences Between Financial and Management Accounting
The basic differences between management accounting and financial accounting are summarized below.
|Basis of Difference||Cost & Management Accounting||Financial Accounting|
|Users||Internal users||External users|
|Restriction on inputs and processes||Not subject to restrictions on inputs or processes||Inputs and processes of financial accounting are well-defined and regulated|
|Types of information||Information may be financial or non-financial and is typically subjective in nature||Due to the regulated nature of financial accounting, it tends to produce objective and verifiable financial information|
|Timing||Cost and management accounting records/reports events that have already occurred, but there is also an emphasis on providing information about future events||Financial accounting has a historical orientation—it records/reports events that have already happened|
|Performance||Cost and management accounting provides measures and internal reports used to evaluate the performance of entities, product lines, departments, and managers||Financial accounting focuses on overall firm performance, providing an aggregated, high-level viewpoint|
|Breadth||Cost and management accounting is broader than financial accounting—it includes aspects of managerial economics, industrial engineering, and management science, as well as numerous other areas||Financial accounting is narrower than management accounting|