Differences between financial accounting and management accounting

Financial accounting and management accounting are two major sub-systems of accounting information system. Both are concerned with revenues and expenses, assets and liabilities and cash flows. Both therefore involve financial statements. But the major differences between the two arise because they serve different audiences. The main points of difference between the two are as follows:

1) External versus Internal Users

Financial accounting information is mainly intended for external users like investors,   shareholder, creditors, Govt. authorities, etc. while management accounting information is mainly meant for internal users such as managers and employees.

2) Statutory requirements

Under company law and tax law, financial accounting is obligatory to satisfy various statutory provisions. On the other hand, management accounting is optional though its utility makes it highly necessary to be adopted.

3) Analysis of costs and profits

Another key difference between financial accounting and management accounting is that financial accounting shows the profit and loss of the business as a while and does not show the costs and profits of individual products, departments or processes. On the other hand, management accounting shows detailed information about individual products, plants, departments or any other cost center.

4) Past v Future Data

Financial accounting involves recording business transactions that have already taken place – uses past or historical data. On the other hand, management accounting is future oriented as it focuses on the things that are likely to happen in the future, although future data may be used to predict future performance.

5) Periodic versus continuous reporting

In financial accounting, financial reports, i.e., Profit and Loss account and Balance Sheet are prepared usually on a year to year basis. Management accounting reports are prepared frequently, i.e., these may be monthly, weekly or even daily depending on managerial requirements.

6) Accounting Standards

Financial accounting is also different from management accounting in terms of accounting standards. Financial accountants are required to produce financial reports according to specific standards such as IASB and IFRS. On the other hand, management accounting is not bound by accounting standards; it may use any practice as long as it generates useful information for managers.

7) Types of statements prepared

Financial accounting prepares general purpose statements, Profit & Loss account and Balance   sheet which are used by external users while in Management accounting special purpose reports   are prepared, e.g. performance report of sales manager or any other department manager which are used by top level Management.

8) Publication and Audit

In financial accounting, financial statements such as profit and loss account and balance sheet are published for general public use and sent to shareholders, and audited by chartered accountants. On the other hand, management accounting statements are for internal use and thus neither published for general public use nor are these required to be audited by chartered accountants.

9) Monetary and non-monetary measurements

Financial accounting provides information in terms of money only while Management   accounting may apply monetary or non-monetary units of measurements for example information may be expressed in terms of money or units of quantity, machine hours, labour hours, etc.

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