Diferences between Management Accounting and Financial Accounting

Financial and management accounting are both necessary parts for a business system; however they serve mostly different functions. An account manager or finance manager uses accounting to work out operational plans for the future, in order to review past performance and to check current business functions. Management and financial accounting have different audiences, as investors don’t seem to be usually involved in the day-to-day operations of the business but are concerned about their investment, whereas managers need information quickly to make day to day business decisions.

What is Financial accounting?

Financial Accounting is used to show the financial situation of an organization to its external stakeholders. Board of directors, stockholders, financial institutions and other investors are the users of the financial accounting reports. Financial accounting provides reports for a specific period of time in the past and enables the audience to see how the company has performed. Financial accounting reports should be created on an annual basis, and for publicly traded companies, the annual report should be made part of the public record.

What is Management or managerial accounting?

Management Accounting is used by managers to take decisions relating to the day-to-day tasks of a business. It is based not on past performance, but on current and future movements of business, which does not allow for exact numbers. Because managers frequently make task judgments in a short period of time in a changeable environment, management accounting depends on heavily on forecasting of markets and trends.

Differences:

Management accounting measures analyzes and reports financial and non-financial information that helps managers make decisions to fulfill the goals of an organization. It focuses on internal reporting and is not restricted by generally accepted accounting principles (GAAP).

Financial accounting focuses on reporting to external parties such as investors, government agencies, and banks. It measures and records business transactions and provides financial statements that are based on generally accepted accounting principles (GAAP).

Management accounting is made for internal users, whereas financial accounting is made for external users/ stakeholders. Although financial management has boundless importance to current and potential investors, management accounting is also essential for managers to make current and future financial decisions. Financial accounting is precise and must follow to Generally Accepted Accounting Principles (GAAP), but management accounting is a lot of speculation or estimation, since most managers do not have time for exact numbers when a decision needs to be made.

Other differences include:

(1) Management accounting emphasizes the future (not the past), and 

(2) Management accounting influences the behavior of managers and other employees (rather than primarily reporting economic events).