What is the Difference Between Financial Accounting and Management Accounting?

Financial Accounting VS Management Accounting

The difference between financial accounting and management accounting is very important to understand as both of them serve different purposes and audiences.

A person from the management may not find certain information relevant, and at the same time, a cost accountant can’t work without this information. A creditor and a manager would need different sets of information from the accounting records of a business.

Financial Accounting

• It is a branch of accounting, which deals with classifying, measuring and recording a business transaction. Financial accounting is concerned with the preparation of financial statements for the purpose of demonstrating the performance and position of a business. The end products are P&L Account for the period end and Balance Sheet as on the last day of the accounting period.

• It is mainly concerned with “External users of information” such as Shareholders, Government, Lenders, Public and other users of accounting information.

• It focuses on historical data and helps in reporting done on quarterly, annually, etc. basis.

• Example: Suppose a Bank wants to decide whether to extend credit to a firm. It will need to look into the business’ financial accounting data such as financial statements.

Related Topic – Difference Between Cost and Management Accounting

Management Accounting

• It helps in effective performance management, control, planning, decision-making, etc. It generally includes budgeting decisions as well. Since management accounting is not a legal requirement, it is not based on Generally Accepted Accounting Principles and accounting standards.

• It is a branch of accounting, which is mainly concerned with “Internal users of information” – commonly, managers. Management accounting provides a basis for internal users to make a logical and informed decision.

• It focuses on the present and future and there is no set reporting schedule.

• Example: Let’s say that a Sr. Manager wants to make an internal decision on an investment made in a particular business segment. It will need internal management accounting data such as the return on investment, etc.

The above information presents a few key points of difference between financial accounting and management accounting.

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