Difference between Financial and Management Accounting

Accounting is a systematic process of measuring the economic activity of a business to provide useful information to those who make economic decisions. Based on the nature of decisions, accounting is divided into following three major types;

Financial accounting is the language of business and focuses on reporting to external parties such as investors, government agencies, banks, insurance companies, analysts, suppliers and other stakeholders. It starts with measuring and recording of business transactions and provides financial statements that are based on generally accepted accounting principles (GAAP). Financial statements are the end result of the process.

Management accounting is concerned with providing information to parties inside an organization. It reports financial and non financial information that helps managers to make decisions in fulfilling certain goals. Internal management takes decisions based on the information which is not disclosed to parties outside the company. They also use it to coordinate product design, production, and marketing decisions and to evaluate performance.

Here is a list of certain decisions that internal management takes based on internal information;

  • Whether to build a new plant,
  • How much to be spent on R&D,
  • Whether to buy or lease facilities,
  • Whether the new product be profitable,

Cost accounting can be viewed as the intersection between financial and Management Accounting. It measures, analyzes, and reports financial and non financial information relating to the costs of acquiring or using resources in an organization.

Modern cost accounting takes the perspective that collecting cost information is a function of the management decisions being made. Thus, the distinction between management and cost accounting is not so clear-cut, and we often use these terms interchangeably in the book.

Particulars Management Accounting Financial Accounting
Purpose of information Help managers make decisions to fulfill an organization’s goals Communicate organization’s financial position to investors, banks, regulators, and other outside parties
Primary users Internal parties of the company External parties like banks, creditors etc
Focus and emphasis Future-oriented Past-oriented
Rules of measurement and reporting Internal measures and reports do not have to follow any accounting principles but are based on cost-benefit analysis Financial statements must be prepared in accordance with GAAP and be certified by external independent auditors
Time span and type of reports Varies from hourly information to 5 to 10 years, with financial and non financial reports onproducts, departments, territories, and strategies Annual and quarterly financial reports, primarily on the company as a whole.
Behavioral implications Designed to influence the behavior of managers and other employees Primarily reports economic events but also influences behavior because manager’s compensation is often based on reported financial results

Now you know the difference between financial and management accounting. We urge you to send your feedback and suggestions on this.

Editorial Staff at Yourfinancebook is a team of finance professionals. The team has more than a decade experience in taxation and personal finance.