Financial Accounting vs. Management Accounting
Although financial accounting and management accounting have their differences, the underlying objective remains. To meet the information needs of the user. Financial accounting is generally used by external users whereas management accounting is generally used inside the organisation. There are several factors which differ between the two and these factors will be set out below.
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The purpose of information differs between financial accounting and management accounting. Financial accounting analyses and reports on the performance of an organisation over a specific period and concludes with its position at the end of the period. On the other hand, management accounting is aimed at recording, planning, and controlling the activities of a business. This aids with managerial tasks looking to create strategic plans.
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Another factor that differs between the two types of accounting is the legal requirements. It is required under Irish law for all Irish companies to prepare and publish financial accounts. The financial statements must be filed to the Companies Registration Office annually containing an income and expenditure account, balance sheet, and notes to the financial statements. The format of financial statements depends on company law, accounting standards and whether it is listed on the stock exchange. While there may be no legal requirements for management accounting, it is considered vital for most the effective management and decision-making. Management accounts can be as detailed or brief as management wants.
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The focus of accounts varies between both financial and management accounting. The focus of financial accounting looks at the performance of the business as a whole rather than specific areas of a business. This is to create an overall picture of the financial position of the organisation. In contrast, management accounting focuses on specific areas within the organisation and looks to improve different aspects of it throughout. These areas could include different departments, branches, or the performance of products.
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Finally, the nature and time frame of information differs. The nature and time frame of information also vary between financial and management accounting. Financial accounting is generally composed of monetary information and by definition, financial accounts present a historical perspective on the financial performance of a business for a specified period. Conversely, management accounting provides both financial and non-financial information to its users in order to meet the internal decision-making needs of management. Management accounting is therefore future-orientated.
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While both financial accounting and management accounting deal with financial information, they serve different purposes, and users and focus on different aspects of the organisation.
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