Differences between Financial and Management Accounting

Management account is meant for internal use and they use records to make future plans while financial accounting focus on past problems, details of this are utilized by investors to know the company’s position.

Accounting as a discipline and practice is concerned with recording, estimating, organizing and summarizing financial and operational data (Garrison, Noreen & Brewer 2011, p. 34; Hilton & Platt 2011, p. 45). The financial information derived could be classified into financial accounting and managerial accounting. These two types of accounting have several aspects which distinguish one from the other.

The first of the differences involve user orientation. Financial accounting deals with providing information to stockholders, creditors, tax authorities and regulators who are outside of the company; whereas, management accounting deals with providing information to the company’s managers who direct and control the company’s operations (Garrison, Noreen & Brewer 2011, p. 33-34; Hilton & Platt 2011, p. 45). Although both groups of users rely on the same financial information, their perspectives vary according to their interests in the firm. For example, stockholders are interested to find out from the financial statements if they have acceptable returns from their investments; while creditors need to know if the company has the capacity to fulfil its financial obligations, while tax authorities need to know how much taxes are due based on the financial operations.

Second, the emphasis of financial accounting is on the financial consequences of past activities while management accounting is oriented towards using the financial data to make decisions for the future (Garrison, Noreen & Brewer 2011, p. 34). Financial accounting is more of a historical account of business activities whereas management accounting aims to project financial events that are yet to come.

Third, financial accounting focuses on objectivity and verifiability, while management accounting emphasizes on relevance (Garrison, Noreen & Brewer 2011, p. 34). Relevance in management accounting means that the financial information should be applicable to the problem. For instance, being able to project the sales volume should indicate the budget required for purchasing inventory and the logistic expenses needed to handle such inventory.

Fourth, financial accounting emphasizes on precision whereas managerial accounting stresses on timeliness (Garrison, Noreen & Brewer 2011, p. 35). Accuracy down to the last centavo is held important in financial accounting. Meanwhile, managerial accounting depends on good estimates which are provided aptly so that decisions and the circumstances in which decisions are made contribute to the efficiency of plans or goals.

The fifth difference concerns about the presentation of financial data. Financial accounting reports the summary of the entire company’s financial activities (Garrison, Noreen & Brewer

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Management accounting may focus on a product and confidential financial reports,financial accounting will account for the past.

Financial accounting covers the entire organization while management accounting may be concerned with particular products or cost centres.

Managerial accounting is used primarily by those within a company or organization. Reports can be generated for any period of time such as daily, weekly or monthly. Reports are considered to be “future looking” and have forecasting value to those within the company.

Financial accounting is used primarily by those outside of a company or organization. Financial reports are usually created for a set period of time, such as a financial year or period. Financial reports are historically factual and have predictive value to those who wish to make financial decisions or investments in a company. Management Accounting is the branch of Accounting that deals primarily with confidential financial reports for the exclusive use of top management within an organization. These reports are prepared utilizing scientific and statistical methods to arrive at certain monetary values which are then used for decision making.

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