By Jackie,
Researcher
Topic: Types
of Accounting (Terminology & Concepts)
The
objectives of this research are to find out what are the major differences
between financial accounting and management accounting.
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Management Accounting sometimes is also known as 'Managerial Accounting'.
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First and foremost, management accounting
is concerned with the provision of information to people within the
organization or ‘internal parties’ (i.e. managers inside the organization) to
help them to make better decisions and improve the efficiency and effectiveness
of existing operations, whereas financial accounting is concerned with the
provision of information to ‘external parties’ outside the organization (e.g.
shareholders, creditors, tax authorities, regulators, potential investors, and
etc). Thus, management accounting could be called ‘internal reporting’ and
financial accounting could be called ‘external reporting’.
Secondly, there is a statutory
requirement for public limited companies to produce annual financial accounts
regardless of whether or not management regards this information as useful. It
must be done as it is ‘mandatory’. Management accounting, by contrast, is
entirely optional and information should be produced only if it is considered
that benefits from the use of the information by management exceed the cost of
collecting it. Thus, it is not ‘mandatory’. A company is completely free to do
as much or as little as it wishes.
Thirdly, financial accounting reports
describe the whole of the business whereas management accounting focuses on
small parts of the organization such as the cost and profitability of products,
services, customers and activities. In addition, management accounting
information measures the economic performance of decentralized operating units,
such as parts, segments, divisions or departments.
Besides, financial accounting statements
must be prepared to conform with the legal requirements and the generally
accepted accounting principles established by the regulatory bodies such as the
Financial Accounting Standards Board (FASB) in the USA, the Accounting
Standards Board (ASB) in the UK and the International Accounting Standards
Board (IASB) to ensure the uniformity and consistency that is required for
external financial statements are achieved so that the inter-company and
historical comparisons are possible. Thus, financial accounting data should be
objective and verifiable. In contrast, management accountants are not required
to adhere to generally accepted accounting principles when providing managerial
information for internal purposes. Instead, the focus is on the serving
management’s needs and providing information that is useful to managers
relating to their decision-making, planning and control functions.
Furthermore, financial accounting reports
what has happened in the past in an organization, whereas management accounting
is concerned with future information as well as past information. Decisions are
concerned with future events and management therefore requires details of
expected future costs and revenues. In other words, financial accounting is
past-oriented (eg. Reports on 2010 performance were prepared in 2011) and
management accounting is future-oriented (eg. Budget for 2011 was prepared in
2010).
In addition, a detailed set of financial
accounts is published annually and less detailed accounts are published
semi-annually. Management requires information quickly if it is to act on it.
Consequently, management accounting reports on various activities may be
prepared at daily, weekly or monthly intervals.
Summary
Additional
readings, related links and references:
Differences
between financial and managerial accounting
The Differences between Financial Accounting & Management Accounting
Financial
and Managerial Accounting Information
Financial
Accounting Vs Managerial Accounting (Cute cartoon illustration)
Dennis Ensing, CA of
WiseMentorCapital, discusses the differences between financial and managerial
accounting. Visit StartMeUpRyerson.com for more resources to help turn your
ideas into reality.
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