Financial Accounting vs. Management Accounting

Difference Between Financial Accounting and Management (Managerial) Accounting

Whenever we are told to account for something, we are simply being told to give reasons or evidence based on factual analysis as to why the subject of interest is the way it is or rather why it behaves in a particular manner. In the world of business accounting is all those activities which results in obtaining, representing and keeping information about an organization for all stakeholders of the organization. These activities involve establishing, managing and auditing the books of account of the organization. From these books, an accountant or a manager can predict the future of the organization in terms of profitability, market share and competitiveness in the industry at large just by looking at trends in the organization at different times .This is facilitated by the fact that all records are made chronologically thus managers can always go back in time and evaluate performance of the business.

Accounting can be discussed under two broad categories; financial accounting and management accounting.

Financial accounting

Financial accounting specializes in taking, analysis and recording of data in an organization for all the transactions done by or on behalf of the organization for the whole term it has been in operation. The financial accountants are charged with the task of providing comprehensive financial reports at fixed time frames from which the financial position of the organization is to be judged. These reports are to be submitted to various parties including banks, shareholders and creditors at the end of trading period-usually one year when financial affairs of the organization are discussed.

Financial accounting information as stated earlier is done overtime with all records arranged in order of occurrence of the transactions thus giving a clear historical overview of the organizations financial performance. This allows the stake holders to compare present performance with the previous as well as predicting for the future .Financial books of account are universal for all organizations, ranging from balance sheets to ledger accounts thus it is also convenient to compare the performance of different organizations by inspecting their books of account.

The law stipulates that all companies under the companies Act 1989 should publish their books of account to be accessed by the public.

Management Accounting

Management accounting as the name suggests is more concerned with the events occurring both within and outside the organization which affect its operation. In otherwords it is charged with the responsibility of monitoring the business environment so as to obtain and channel important information for laying down the organizations strategies. On getting the information now the internal staff can plan and control business activities.Management accounting does not follow time frames but rather deals with arising issues.

Management accounting takes into consideration both finance related  and unrelated information.Some of the aspects focused on is like risk evaluation of decisions made by the business, cost  behavior, capital budgeting, profit planning and standard costing.

Differences between financial and management accounting

There are no clear cut rules for management accounting  thus depends on prevailing matters needing to be addressed whereas in financial accounting, there are set universal principles of accounting to be followed.

Management accounting follows the principle of management by exception, concentrating on factors that are not going according to the planned results and helping them in decision making process, whereas financial accounting is charged with a specific task of providing a holistic picture by the end of a specific financial period.

Financial accounting restricts itself to monitory information whereas management accounting takes into account both financial and non-financial information.

Financial accounting focuses on historic data while management accounting is more concerned with the general performance of the organization.

Conclusion

Looked at from any direction the cutting differences between financial and management accounting are quite clear and therefore should not be misinterpreted.

 

  • Very good information. Accounting has different types depending on which factors are being compared.