Difference Between Management and Financial Accounting

Management accounting and financial accounting comprise the two main branches of accounting in general. To those unfamiliar with field, such a distinction may seem gratuitous. However, the distinctions accounting are not merely nominal. Generally, data related to events, transactions and activities within an organization form the common source of information for management and financial accounting. There are six major differences between them.

Purpose

Financial accounting is designed to state the financial position of an organization and provide information about its revenue generation/profits to stakeholders. It is geared towards external information users- primarily regulators, government and owners. Management accounting has an internal focus, on the other hand. Accountants/accounting clerks prepare such information for internal managers, who use it to aid and facilitate planning, decision-making and control.

Legal requirement

Management accounting is optional - used solely at the discretion of an organization’s managers. External stakeholders usually do not even view management accounts. This is because there is no legal requirement for any organization to prepare management accounts. Financial accounts are for external users. However, only limited liability companies bear the legal obligation to produce these accounts.

Format and standards

The formats of management accounts are exclusively at the discretion of managers. However, financial reports must adhere to International Financial Reporting Standards and International Accounting Standards. This makes financial reports virtually standardized while management accounting formats and systems vary widely among and within organizations.

Scope

Financial accounts represent an aggregate of entities, activities and operations for the whole organization, including any subsidiaries. The focus of management accounts is far more specific, as it deals with particular activities, sections or departments. Therefore, it has an inherently narrower focus than financial accounting.

Content

Financial reports usually deals with financial information. In other words, most things in a financial report are of a monetary nature (having a dollar value). Management accounts incorporate both monetary and non-monetary measures, i.e. financial and non-financial information. This does not mean that financial reports are not complete- just that data needs to be transformed to monetary figures for financial reports. After all, financial reports do not account for productivity or employee morale.

Period covered

By nature, financial accounts provide a historical representation of an organization’s operations for a defined period. Management accounts can provide aspects of past operations and projections for future operations, since they are also planning and decision-enabling tools.

The differences between te two types of accounting is significant to management and accountants. Since information has objectives that information users define, production of management accounts and financial accounts consider the needs of these users, whether internal or external. Since financial reports for limited liability companies are mandatory and regulated, it merely requires conformity.