Accounting is often divided into two categories i.e., Financial Accounting and Management Accounting.
Financial accounting information is designed primarily for use by persons outside the firm, as creditors, stockholders, owners, governmental agencies and the general public. Most companies publish the financial accounting data through a set of general purpose statements known as the company’s Annual Report. These statements provide most of the information needed by external users. Specialized needs of specific users are satisfied through supplementary reports which are published at various intervals.
Financial Accounting provides information that covers relatively long periods of times. In addition, Financial accounting information is historical in nature and the financial accounting reports concentrate more on the results of past decisions.
Financial Accounting is governed by the generally accepted accounting principles that are subject to ever-changing rules and regulations and also disputed interpretations. Financial accounting reports are developed from the basic accounting system, which is designed to highlight the data about completed transactions.
Management Accounting is primarily concerned with managers of a company and provides information meant for internal use: Managers gather this data and analyze, process, interpret and communicate the results so that this information can be used for making sound internal decisions, e.g., financial decisions, marketing decisions, production decisions, resource allocation decisions and so on.
Management Accounting helps the different departments in an organization to work in a successful coordinated manner by acting as a communication link between various departments. Managerial accounting reports are usually designed for a specific decision and provide information for relatively short periods of time. They are not governed by any set of principles and are not required by law.
Since management accounting is not required by law, the reports prepared by management accountants are subject to a cost-benefit analysis, i.e., the perceived benefits of the report should exceed the costs. Also, since no external standards are imposed on information provided to internal users, management accounting reports run the risk of being subjective.
In summary, both Managerial and Financial accounting deal with economic events. Both are concerned with revenues and expenses, assets, liabilities and cash flows. Also, both require quantifying the results of economic activity.
In actual practice, it is difficult to classify information as being either exclusively financial or managerial. The two accounting systems are part of the total business system and hence they normally overlap. For example, much of the future planning data associated with managerial accounting is based on the historical information which is retained for financial accounting purposes.
Difference between Financial and Management Accounting
The basic difference between management accounting and financial accounting is as below:
|Basis of difference||Cost & Management Accounting||Financial Accounting|
|Users||Internal users||External Users|
|Restriction on inputs and processes||It is not subject to the Restriction on inputs requirements of generally accepted accounting principles.||The inputs and processes of financial accounting are well defined and in fact, restricted.|
|Types of information||In cost & management accounting information may be financial or non-financial and may be much more subjective in nature||The restriction imposed by financial accounting tend to produce objective and verifiable financial information.|
|Timing||Although cost & management accounting also records and reports events that have already occurred, there is also a very strong emphasis on providing information about future events||Financial accounting has a historical orientation. It records and reports events that have already happened.|
|Performance||Cost & management accounting provides measures and internal reports used to evaluate the performance of entities, product lines, departments and managers. Essentially very detailed information is needed and provided.||Financial accounting focuses on overall firm performance, providing a more aggregated viewpoint.|
|Breadth||Cost & management accounting is much broader than financial accounting. It includes aspects of managerial economics, industrial engineering and management science, as well as numerous other areas.||Financial account is less broader as compared to management accounting.|