Accounting is a very essential and crucial part of any type of business or organization. It provides the necessary financial information required for making informed decisions. Accounting is divided into two major categories: financial accounting and management accounting. While both types of accounting provide valuable information to businesses, there are significant differences between them. In this article, we will discuss financial accounting and management accounting, their functions, differences, similarities, and how they contribute to the success of an organization. So let’s first have a look at a table comparing both financial vs management accounting in a good manner.
Financial Vs Management Accounting (Chart)
| Financial Accounting | Management Accounting |
|---|---|
| Financial accounting refers to the process of recording, summarizing, and reporting financial transactions of a company or organization. | Management accounting refers to the process of analyzing, interpreting, and presenting financial information to internal stakeholders such as managers, executives, and decision-makers. |
| The main purpose of financial accounting is to provide a summary of the financial health of an organization to external stakeholders, such as investors, creditors, and regulatory authorities. | The purpose of management accounting is to provide timely and relevant information to support decision-making, planning, and control within the organization. |
| The users of financial accounting are external stakeholders such as investors, creditors, and regulatory authorities. | The users of management accounting are internal stakeholders such as managers, executives, and decision-makers. |
| It provides periodic reports such as quarterly and annual financial statements. | It provides reports on a more frequent basis such as daily, weekly, or monthly. |
| Financial accounting follows Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). | Management accounting has no standardized principles. |
| It has a broader scope and covers the entire organization or company. | It has a narrower scope and covers specific departments, projects, or business units within the organization. |
| Financial accounting focuses on historical financial information or data. | It focuses on future financial performance and planning. |
| Legal compliance for financial accounting is required by law, and companies are legally obligated to produce financial statements. | It is not required by law and is optional. |
What is Financial Accounting?
Financial accounting refers to the process of recording, summarizing, and reporting financial transactions of a company or organization. Financial accounting provides a summary of the financial health of an organization to external stakeholders, such as investors, creditors, and regulatory authorities. It is a standardized process that follows Generally Accepted Accounting Principles (GAAP).
4 Functions of Financial Accounting
Some key aspects and functions of financial accounting are:
- Recording: This involves the systematic recording of financial transactions in the accounting system. These transactions include purchases, sales, payments, receipts, and other financial activities.
- Classifying: This involves sorting and categorizing financial transactions into appropriate accounts such as assets, liabilities, equity, revenue, and expenses.
- Summarizing: This involves preparing financial statements such as the balance sheet, income statement, and cash flow statement that provide a summary of the financial health of the organization.
- Reporting: This involves presenting financial information to external stakeholders in the form of financial statements.
What is Management Accounting?
Management accounting is the process of analyzing, interpreting, and presenting financial information to internal stakeholders such as managers, executives, and decision-makers. The purpose of management accounting is to provide timely and relevant information to support decision-making, planning, and control within the organization.
4 Functions of Management Accounting
The four major aspects and functions of management accounting are as follows.
- Planning: This involves setting goals, developing budgets, and forecasting future financial performance based on historical data.
- Controlling: This involves monitoring and measuring actual financial performance against budgets, identifying variances, and taking corrective action.
- Decision-making: This involves using financial information to make informed decisions such as pricing, product mix, and investment decisions.
- Performance Evaluation: This involves evaluating the performance of the organization or business unit against predetermined benchmarks and targets.
8 Key Differences Between Financial and Management Accounting
While comparing financial vs management accounting, here we have included some of the key differences between them as well. They are as follows.
- Meaning: Financial accounting refers to the process of recording, summarizing, and reporting financial transactions of a company or organization. On the other hand, management accounting is the process of analyzing, interpreting, and presenting financial information to internal stakeholders such as managers, executives, and decision-makers.
- Users: Financial accounting is aimed at external stakeholders such as investors, creditors, and regulatory authorities. On the other hand, management accounting is aimed at internal stakeholders such as managers, executives, and decision-makers.
- Reporting Frequency: Financial accounting provides periodic reports such as quarterly and annual financial statements. In contrast, management accounting provides reports on a more frequent basis such as daily, weekly, or monthly.
- Standards: Financial accounting follows Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). On the other hand, management accounting has no such standards.
- Scope: While financial accounting covers the entire organization or company, management accounting covers specific departments, projects, or business units within the organization.
- Legal Compliance: Financial accounting is required by law, and companies are legally obligated to produce financial statements. Management accounting, on the other hand, is not required by law and is optional.
- Focus: Financial accounting focuses on historical financial information, while management accounting focuses on future financial performance and planning.
The table also shows a side-by-side comparison between financial and management accounting.
Similarities Between Financial and Management Accounting
Despite the differences, there are some similarities between them as well. They are as follows.
- Both types of accounting are essential for the smooth operation of an organization.
- Both types of accounting use the same basic accounting principles and techniques.
- And finally, they provide valuable financial information to support decision-making.
Why Both Types of Accounting are Important for Businesses
Both financial accounting and cost accounting are essential for businesses to make informed decisions. Financial accounting provides external stakeholders with accurate and reliable financial information, which is necessary for investment and lending decisions. Cost accounting, on the other hand, provides internal stakeholders with information about the cost of producing a product or service, which is necessary for pricing decisions, budgeting, and identifying areas of inefficiency.
Conclusion
So, in conclusion, financial accounting and management accounting are two essential types of accounting that provide valuable information to different stakeholders. While financial accounting is focused on providing financial information to external stakeholders, management accounting is focused on providing information to internal stakeholders. Both types of accounting have their unique functions, such as recording, classifying, summarizing, reporting, planning, controlling, decision-making, and performance evaluation.
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