Financial Accounting vs. Management Accounting

26 Dec 2018
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When you hear the word “accounting”, chances are that your mind immediately goes to money. Accounting does deal primarily with the money that goes through a business. It describes the movement of the money in great detail and is an extremely important tool for determining the legality and success of a company. If done well, accounting can help us understand how well we deal with our expenses, what profit we’re getting, risks and opportunities for investments, the future of the company, and much more. Therefore, it’s a highly important branch of business.

Now, the thing that normally causes confusion is the division between financial and management accounting. While financial accounting is what we normally expect – ie. reports of the current financial situation in a company; management accounting is creating reports that will help managers decide on the best course of action. It’s completely internal, and largely predictive instead of descriptive. Here are the most important differences between the two.

1. Purpose

When it comes to financial accounting, the main goal is to make a company’s records available for outside viewing. That means that the financial records are made for the general public, and all facts and figures are disclosed publicly. These reports aim at giving the potential investors an idea of how well the company is doing and how well it can be expected to do in the future. They are also meant to be available to the shareholders, in order to give them insight into the financial aspects of the company whose shares they own.

Management accounting, on the other hand, is not meant for the eyes of the general public. The reports of management accounting are done purely for internal purposes. Everything about them is confidential and they are used for aid in decision making within the company. They exist to encourage or prevent action such as acceptance of projects. The only people concerned with these reports are the managers of the company, and the reports are usually not disclosed to anyone else.

2. Scope

Next point of difference is the scope of the reports. Financial accounting deals with the results of the entire business. They also usually aim only at a company’s financial data, excluding everything else. These reports are about financial statements, which then get distributed both within and outside of the company. On the other hand, management accounting is about creating operational reports, which are much more detailed and include all sorts of things. They can discuss the profits in relation to product, service, customer, etc, which means that they are not purely financial statements. They need to include all kinds of data that can be useful in the decision-making process, so it’s important for every company to work with capable experts in this field. Good management accounting can save your company from financial loss, and it can significantly improve your business.

3. Accuracy

Financial accounting reports have to be accurate and made with precision. These are sensitive information, and should always be double checked. As opposed to that, management accounting is more about estimation, so the accuracy of the reports cannot really be measured immediately. They are used for planning and forecasting, so the facts are not as verifiable as is the case with financial accounting. The need for the maximum possible precision in both areas is exactly why every company needs capable professionals. If your business is located in Australia, the trustworthy accountants from Glebe will be able to help you on both fronts. Precise financial and management reports can be a key to successful business.

4. Standards and the law

Financial and management accounting comply with different standards (or lack of thereof). The former has to respect universal standards, such as IFRS or US GAAP. It is necessary because that makes it much easier for the people in the field to understand the reports. Also, financial reports are a legal requirement. The latter has no particular regulations or set standards. The format depends on the target audience and is generally dependent only on the traditions of the given company. This type is not regulated by the law.

5. System

While financial accounting doesn’t deal with the overall system of the company and focuses simply on the profits and losses, management accounting is a bit more complicated. Except for having a role in the decision-making process of the company, it also aims at solving any bottleneck issues. This requires a thorough understanding of the company’s systems and procedures, which makes the management accountant’s job all the more complicated.

6. Timing

Financial reports are usually made at the end of an accounting period, which is usually a year. Conversely, management accounting reports are made more frequently than once a year. Because their purpose is to improve the future of the company, they are needed whenever there is an important decision to be made.

7. Time period

The last distinction between the two is the time period they cover. Financial reports are historically oriented, as they describe the results that were achieved in the past. In contrast, management accounting reports are about the present, as they can show the current events and the progress that is (not) being made at the moment. They can also be oriented towards the future because they also deal with forecasts.

 

Both kinds of accounting are useful in their ways. While financial reports deal with the financial aspect of a company in past periods, management reports are about the current state, predictions, and decision-making.

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