Within accounting, there are two key fields that relate to different aspects of the business’s finances, financial accounting, and management accounting. While both use the same underlying information, for the most part, the use and perspective provided can vary greatly. This article will explain the differences between financial accounting and management accounting.
Financial accounting refers to the accounting and financial statements that are provided to external users, for example, shareholders, banks, and regulators.
The goal of financial accounting is to present a clear picture of the financial performance and position of a company.
Publicly listed companies are required to have their financial statements, prepared using financial accounting rules, audited, and released to the public. This ensures that their financial accounting is generally accurate, unbiased, and freely available to any investors or potential investors. In the U.S. the Financial Accounting Standards Board (FASB) details the financial accounting guidelines that companies are required to follow. The standard financial statements presented with financial accounting are the balance sheet, income statement, and cash flow statement.
For non-publicly traded companies financial accounting rules still come into play as the basis of a great deal of information required for submitted tax returns are done with financial accounting guidelines.
Management accounting refers to accounting and financial information that is used and presented internally in a company. For management purposes, it is often necessary to summarize different financial information in a manner that assists with managing the company. Internal product costing reports, raw material usage efficiency, and regular sales reports are the types of management accounting reports that many companies use but would not disclose publicly.
Management may also have different versions of financial accounting reports, the balance sheet, income statement, and cash flow statement, prepared using different rules that they see being useful internally. These would only be for internal use and wouldn’t necessarily be suitable for audit or public disclosure.
As management accounting varies depending on the company and the preferences of management there is no set guideline for how management accounting needs to be presented or prepared. Management accounting courses do their best to prepare accountants in university to prepare at least the basic and most commonly used management accounting reports.
When considering financial accounting and management accounting the clearest distinction to make is that financial accounting is what is used to present outside the company and management accounting is what is used inside the company. While the same underlying information will generate both, the purpose and use of the reports presented will vary. Many financial accounting reports wouldn’t be detailed enough to be useful internally, meanwhile, management accounting reports may not be useful for external individuals trying to assess a company. Furthermore, many management reports would never be disclosed outside the company as competitors could use the information to gain insight into efficiencies or trade secrets that exist.