Financial accounting and management (managerial) accounting are two divisions in accounting, both are equally important for an organization. Accounting plays a pivotal role in the functioning of the organizations. On a broader scale, accounting deals with the establishing, managing and auditing the accounting books of the organizations. With just the figures on sales, overheads and the purchases, the accountant has the ability to analyze the financial position of the organization at real time. The records are arranged in chronological order and are later interpreted. On the whole, the present and future economic stability of an organization can only be explained through accounting.
There are two main branches of accounting namely financial accounting and management accounting. These two accounting fields deal two separate areas but depend on each other.
Financial accounting is primarily concerned with providing the data which can be presented to the external parties of the organization. The parties include banks, creditors, and shareholders. Furthermore, this field of accounting is liable to provide and depict the overall performance of the company in a certain time frame. The period is well defined and the states of affairs are discussed at the end of this period. This specific period is often referred to as the “Trading Period” and is usually one year.
Financial accounting information are more of a historical data of the company performance and monetary in nature. The format of the financial accounting statements are universal and thus are used in the same manner everywhere. These account statements can be easily compared with two different periods or can be compared with other company’s account statements as well.
For the companies that are incorporated under the Companies Act 1989, it is a requirement by law to prepare and publish financial accounts.
Management accounting deals with another aspect of the finances of the organization. The information revealed by management accounting is primarily used by the internal staff, which uses the financial accounting data. Management account is more used in the strategic management of the organization and helpful in decision making. As it is used by internal staff, to plan and control business activities, there is no set period for this reporting or any legal requirement.
Management account use both financial and non-financial information in management reports. The major areas covered by management accounting is break even point, cost behaviors, capital budgeting, profit planning, standard costing, relevant cost of decision making and activity based costing. The cost calculated in the management accounting process in later used in financial statement under the standardized rules of financial accounting.
Difference between Financial Accounting and Management Accounting
Management account is not bound to use the rules stated under GASP (General accounting standard principles) whereas the financial accounts are bound to follow them.
Management accounting can focus on specific areas of the organization and aid them in the decision making process. However, financial accounting caters the entire organization, aggregates all the costs and revenues and gives the holistic picture by the end of a specific financial period or “Trade period.”
Management accounting deals with financial and non financial information such as sales volume, productivity, etc., where as the financial accounting is based purely on monetary concept.
Financial accounting present historic data of the business performance, management accounting though mostly focus on analyzing historic performance, it also include business trends and forecasts.
On the whole there is a vast difference between the two fields that is of financial accounting and management accounting and thus both of them should always be taken separately.