Difference between financial accounting and management accounting


Management accounting should not be construed as the new method of accounting; however, it refers to the application of accounting skills to the various problems faced by the management in the organizational functioning.

Management accounting can be said to include the use of all accounting techniques; financial and cost and also the use in appropriate situations relating to mathematical and statistical techniques. According to this stand point, the methods and techniques usually applied include:

Analysis of cash and funds flows;
Analysis and interpretation of financial statements with the help of accounting ratios and statistical measures;
Financial planning;
Trend analysis and business forecasting;
Capital budgeting;
Marginal costing;
Budgetary control and standard costing;
Operations research;
Performance and efficiency audit and

Financial accounting is concerned mainly with the historical aspects of external reporting, that is, providing financial information to outside parties such as investors, creditors and governments. For the purpose of protecting those outside parties from being misled, financial accounting is governed by what are called generally accepted accounting principles (GAAP). Management accounting on the other hand is concerned primarily with providing information to internal managers who are charged with planning and controlling the operations of the firm and making a variety of management decisions. Because of its internal use, management accounting is not subject to GAAP. More specially, the difference between financial and management accounting can be explained as detailed below:

Financial accounting is related to providing data for external users like shareholders, investors, government agencies, suppliers, customers etc. Management accounting provides data for the internal users.
Financial accounting is required as per the laws in force in the respective countries, where the management accounting is not mandatory by law;
Financial accounting is governed by generally accepted accounting principles, whereas management accounting is not subject to generally accepted accounting principles;
Financial accounting generates accurate and timely data whereas management accounting highly emphasizes relevance and flexibility of data;
Financial accounting emphasizes the past and it relates to the transactions regarding to income earned by the firm and expenditure incurred by the firm. Management accounting relies more emphasis on the future;
Financial accounting looks at the business as a whole; whereas, management accounting focuses on parts as well as on the whole of a business;
Financial accounting stands primarily by itself; whereas, management accounting draws heavily from other disciplines such as finance, economics and operations research;
Financial accounting has an end in itself; whereas, management accounting is a means to an end.

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