Accounting is classified into two main types; financial accounting and managerial accounting. Financial accounting refers to the generation of periodic reports in conformance to the requirements of shareholder statute and other external bodies like government agencies.
Managerial accounting refers to the identification, processing and communication of information needed for managerial planning, evaluation and control in an organization. Thus, the major difference between the two is that financial accounting is meant for use by external parties like creditors, shareholders, etc. while managerial accounting is meant for use within the organization by managers.
This basic difference leads to a number of other notable differences between management and financial accounting despite the fact that both use the same financial data. In addition to the people targeted by the accounting reports, the two also in the final data presented to users, addressing of the future or the past etc. Let us have a closer look at these differences (“Financial and Management Accounting”, 2008, p. 1).
Basic differences
The differences between managerial and financial accounting include the stated fact that management accounting prepares reports for use within the organization by employees and managers while financial reports are generated for use by parties who are not a part of the organization i.e. external parties. These include government agencies, shareholders, banks, creditors etc (Geoffrey, 2009, p. 1). Another difference is evident in the objectives of the two types of accounting.
While managerial accounting is aimed at providing information for decision making e.g. cost information, cash flows, budgets, etc., financial accounting is aimed at recording organizational performance over a specific period of time, preparing financial statements for this period and stating the position of the organization at the end of the specified period.
The stated difference in the objectives of the two types of accounting makes them to differ in their priorities. Management accounting prioritizes timeliness of information while financial accounting prioritizes precision of information (Gupta, 2009, p. 1).
This is because for management reports to have the desired impact on an organization, they must be presented to the management early enough to give the management time to make decisions. On the other hand financial information has to be precise in order to win the confidence of shareholders, creditors and government agencies. This will, in turn, lead to organizational welfare brought about by the transactions these parties make with the company.
Additionally, management accounting is optional since it is not a legal requirement while, on the other hand, financial accounting is a must for all limited companies. Thus management accounting is carried out as an organizational need while financial accounting is carried out as a regulation.
Management accounts are a means to an end while financial accounting provides an end in its accounts. This is substantiated by the fact that management accounts are not products of organizational decisions but they aid in making the decisions while financial accounts are final products presented to their users. The two types of accounting also differ in their scope.
This is evidenced by the fact that management accounting may concentrate on specific parts (activities or operations) of an organization while financial accounting covers the whole organization. Management accounting may deal with both monetary and non-monetary information while financial accounting strictly works with monetary information. Management accounting deals with either the immediate past of the future while financial accounting deals entirely with past information (Geoffrey, 2009, p. 1).
This is due to the fact that management accounting is for decision making and thus it is used for planning the future of the organization while financial accounting is for the reporting of past operations and thus it deals with past performance. Management accounting does not have specifications for the time span after which it should produce financial statements but financial accounts must be prepared annually and their statement presented to the concerned parties (“Financial and Management Accounting”, 2008, p. 1).
Regulatory bodies
Financial accounts must be prepared in accordance with the rules set out by the IASs (International Accounting Standards) and the law. Thus financial accounting must follow the GAAP (Generally Accepted Accounting Principles). This enables easy comparison of the financial accounts of different organizations.
On the other hand, managerial accounting is not governed by any rules and it concentrates on the usefulness of its accounts to the decision-making function carried out by managers. Its accounts are therefore not prepared in accordance with the specifications given by the IASs. It also does not have format specifications for its accounts from the law (Gupta, 2009, p. 1).
Audits
Due to the difference in the objectives and users of the reports from the two types of accounting, the need for verification of their truthfulness varies. Management accounts are used within the organization and thus there is a negligible motivation for manipulation of figures. The fact that it is meant for future planning, phases out the possibility of untruthfulness meant to cover frauds and mistakes. Due to the fact stated above, management accounts are not subject to auditing requirements.
On the other hand, financial accounts are presented to external parties like shareholders, creditors, banks, government agencies etc. and thus their truthfulness may be compromised. The fact that financial accounts are concerned with historical data is also an input to the need for establishment of the truthfulness of financial accounts since they may be manipulated to conceal unintentional errors and frauds.
It is, therefore, a legal requirement that all financial accounts for limited companies be audited to establish their truthfulness. Financial accounts are, thus, characterized with data objectivity and verifiability due to the auditing requirement. On the other hand, as long as the items presented in management accounting reports are relevant to decision making, data objectivity and verifiability is not mandatory (“Financial and Management Accounting”, 2008, p. 1).
Conclusion
From the discussion above, it is apparent that management accounting is mainly concerned with cost analysis and budgeting functions aimed at aiding management in decision making while financial accounting is concerned with recording of financial data related to transactions and the use of this data in the preparation of periodic financial statements for presentation to external parties.
The differences between management accounting and financial accounting are, therefore, inexhaustible due to the differences in their objectives, scope, timeliness and the difference in the users of their reports.
Additional differences that are not mentioned in the discussion above include the fact that in financial accounting, management should be concerned about the sufficiency of disclosure in statements while in management accounting, the management should be worried about the effects the management reports are bound to have on employees and the organization as a whole (Geoffrey, 2009, p. 1). Therefore, management accounting and financial accounting are very different.
Reference List
Geoffrey. J. (2009). Comparison of financial and management accounting. Web.
Gupta. T. (2009). Introduction to managerial accounting (Cost or Management Accounting). Web.
Transport Financial Analysis. (2008). Financial and Management Accounting. Web.