Difference between financial accounting and management accounting
Financial accounting vs management accounting:
Accounting can generally be described as the precise and methodical recording, assessment and reporting of a company’s financial deals. It is indeed a very wide arena which consists of many sides and angles, aspects and factors. The study of accounting itself has become a rather formidable field which is in high demand. Yet accounting consists of many facades of which one facade of specialization is attributed to financial accounting while another can be termed as management accounting.
What is financial accounting?
Out of the many areas of specialization within the study of accounting itself, financial accounting refers to the reporting of the financial position and performance of a company through financial statements which are issued to external users on a periodic basis. These records or reports in turn help those concerned with the company to recognize the financial situation of the company as well as its progression or downfall. Financial accounting deals with reporting the results of a corporation’s past transactions on its balance sheet, income statement, statement of cash flows, and statement of changes in stockholders’ equity which will prove to be useful for these outside entities who show an interest in the company.
What is management accounting?
Management accounting has a strong future orientation and the data received during this process is used for assessing the future financial aspects of a company which helps a manager’s job to plan. Management accounting is utilized by managers to make decisions concerning day-to-day operations of a business and is based on current and future trends and never on the past. It relies rather strongly on forecasting of markets and trends and therefore, managers are required to base their decisions based on a fluctuating environment because of the fact that current and future trends do not provide specific, precise data.
What is the difference between management accounting and financial accounting?
There are many differences between financial and management accounting whereas they are both based on the financial aspects of an organization. One such major difference is the fact that while financial accounting is meant to be shared with extenal stakeholders and other parties who are interested in the company, management accounting is utilised for internal purposes for the use of managers of the company who are responsible for making decisions, drawing up plans which will be based on these facts and reports.
Another difference between the two is that while financial accounting is bound to comply to General accounting standard principles, management accounting is not. Also, while financial accounting is based on past financial transactions of the company, management accounting is based on current and future tends which do not provide any specific and solid data. And therefore, one can say that while financial accounting is based on solid grounds and solid data, management accounting is done in a constantly fluctuating environment which is subject to drastic change.
Also, while management accounting focuses on both monetary and non financial information during its process, financial accounting focuses solely on the monetary aspect of the company. While management accounting can focus on specific areas of the company which in turn will help in the decision making process, financial accounting focuses more or less on the financial interactions of the entire organization.