Updated November 9, 2023
Difference Between Financial and Management Accounting
What comes to your mind when you think about “Accounting”? Well, for most people, what generally strikes is money and how to account for such money. Accounting is one of the subjects in the main Commerce stream, which gives a detailed view of the movement of money. In different currencies, depending upon the location where it is studied, this subject lets us know how to report our income, expenses, investments, assets, and other transactions. Accounting is a very important practice since proper accounting of transactions can help us understand the prospects, risks, and returns on investments, how well we manage our expenses, and what profits we are making. Reporting transactions holds equal importance to the process of accounting. Now, reporting can be either on a granular and internal level (Management Accounting) or a higher and public level (Financial Accounting).
Financial Accounting vs Management Accounting are sub-streams of the main Accounting vertical.
Financial Accounting, as the name goes, deals with reporting of finances of a company for public use. The company uses Management Accounting to report financial data for internal purposes, and higher management primarily uses it.
Financial vs Management Accounting Infographics
Below is the top 9 difference between Financial Accounting and Management Accounting
How is Financial vs Management Accounting Similar?
There are, obviously, certain similarities between Financial Accounting vs Management Accounting – let us have a look at the key difference :
- Financial Accounting and Management Accounting are a part of the main Accounting stream.
- Both these sub-streams follow the same rules and principles of accounting. They have the same effects given to Debits/Credits, Assets/Liabilities, and Income/Expenses; both follow the same Chart of accounts, etc.
- If both types of accounting are to be applied in a particular situation, their origin should be the same. In other words, they would both refer to common starting points like Gross Sales, Total Investments, etc., for reaching a result. Moreover, they may also have the same origins in the company’s accounting system.
- Financial Accounting and Management Accounting aims to report numbers the company can use to improve its prospects. Reporting may be a little different in both types of accounting, but the end numbers indicate the company’s growth (or lack of growth). Hence, management may make appropriate decisions to gear up the progress accordingly.
Financial Accounting vs Management Accounting Comparison Table
Despite belonging to the same stream, Financial Accounting and Management Accounting were created differently for specific reasons, resulting in differences. Let’s have a look at the Comparison between Financial Accounting vs Management Accounting:
| Financial Accounting | Management Accounting |
| Reporting is made for public view; the company discloses all amounts, facts, and figures. | For a company’s internal purpose – hence the name. Facts and figures are confidential o management teams and other decision-making individuals. |
| Follow universal reporting standards of Accounting like IFRS or US GAAP, which are easily understood by other individuals versed in these. | Do not have a set pattern or format or reporting. The company reports figures per the target audience’s requirements and may or may not include certain information as needed. |
| Generally, they tend to aim only at a company’s financial data. | Can include financial and non-financial data in reports as per the requirement. |
| Reports are first audited and then published or reported. | The company does not require a formal audit structure for such reporting. |
| Facts and figures are supposed to be accurate, as they are sensitive information. | The company generally uses estimates for figures, which they then use for future planning, budgeting, and forecasting. |
| Reporting is made at the end of a certain period (usually done annually, after the end of the financial year closing). | The company reports more frequently than once yearly since it uses the information to improve its planning and decision-making processes. |
| A target audience is the entire world since these are reported centrally to a global or regional body, and information can be made public. | Compared to the reporting for Financial Accounts, the target audience for these reports is much smaller. Typically, the higher management or decision-makers for a particular project discuss such reports in small meetings. |
| Reports are used in company analysis – to understand the company’s performance in the past and to try to analyze different statements about how it plans to use its funds in the future. | The company uses reports to make decisions such as accepting or rejecting projects, allocating resources, making procurement-related decisions, and more. |
| The facts and figures reported areas of a particular date in the past. | In Management Accounting, the reporting of facts and figures is in real-time. |
Conclusion
In this Financial Accounting vs Management Accounting article, we have seen financial accounting and management accounting, also referred to as Financial and Management Reporting, respectively, benefit a company’s progress.
Management Reporting works at a more granular level and provides the decision-makers with an insight into where the projects and processes of the company stand at any given time. It helps them to make better decisions within the available time and to take things under their control. It also suggests better ways to reach the required goals. The company sometimes restricts access to these reports to individuals on a need-to-know basis as they are confidential.
Similarly, Financial Reporting is a standard requirement for all audited companies to follow. Such a reporting system can measure a company’s performance through the reports it publishes. Analysts and economists use the standard statements published by the company annually or semi-annually to understand the growth of such a company. It also reflects the management’s performance during the previous year. Based on the analysis made by such analysts and economists, investors decide whether to invest in these companies or not.
Thus, neither reporting can be missed from a company’s perspective. However, from an analyst’s perspective, it is very important to use proper tools to understand and analyze the reports to make the right decisions.
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