Comparison of management accounting and financial accounting

The structure of accounting as documented by the International Federation of Accountants

The differences between management accounting and financial accountinginclude:
[1]

1. Management accounting provides information to people within an organization while
financial accounting is mainly for those outside it, such as shareholders
2. Financial accounting is required by law while management accounting is not. Specific
standards and formats may be required for statutory accounts such as in the
I.A.SInternational Accounting Standard within Europe.
3. 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 fiscal 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. Such reports may
include:
Sales Forecasting reports
Budget analysis and comparative analysis
Feasibility studies
Merger and consolidation reports
Financial Accounting, on the other hand, concentrates on the production of financial reports,
including the basic reporting requirements of profitability, liquidity, solvency and stability.
Reports of this nature can be accessed by internal and external users such as the shareholders,
the banks and the creditors.


There are two broad types of accounting information:
Financial Accounts: geared toward external users of accounting information
Management Accounts: aimed more at internal users of accounting information
Although there is a difference in the type of information presented in financial and
management accounts, the underlying objective is the same - to satisfy the
information needs of the user.
Financial Accounts Management Accounts
Financial accounts describe the
performance of a business over a
specific period and the state of affairs
at the end of that period. The specific
period is often referred to as the
"Trading Period" and is usually one
year long. The period-end date as the
"Balance Sheet Date"
Management accounts are used to help
management record, plan and control the
activities of a business and to assist in the
decision-making process. They can be
prepared for any period (for example, many
retailers prepare daily management
information on sales, margins and stock
levels).
Companies that are incorporated under
the Companies Act 1989 are required
by law to prepare and publish financial
accounts. The level of detail required
in these accounts reflects the size of
the business with smaller companies
being required to prepare only brief
accounts.
There is no legal requirement to prepare
management accounts, although few (if any)
well-run businesses can survive without
them.
The format of published financial
accounts is determined by several
different regulatory elements:
Company Law
Accounting Standards
There is no pre-determined format for
management accounts. They can be as
detailed or brief as management wish.
Financial Accounts Management Accounts
Stock Exchange
Financial accounts concentrate on the
business as a whole rather than
analysing the component parts of the
business. For example, sales are
aggregated to provide a figure for total
sales rather than publish a detailed
analysis of sales by product, market
etc.
Management accounts can focus on specific
areas of a business' activities. For example,
they can provide insights into performance
of:
Products
Separate business locations (e.g. shops)
Departments / divisions
Most financial accounting information
is of a monetary nature
Management accounts usually include a wide
variety of non-financial information. For
example, management accounts often
include analysis of:
- Employees (number, costs, productivity
etc.)
- Sales volumes (units sold etc.)
- Customer transactions (e.g. number of
calls received into a call centre)
By definition, financial accounts
present a historic perspective on the
financial performance of the business
Management accounts largely focus on
analysing historical performance. However,
they also usually include some forward-
looking elements - e.g. a sales budget;
cash-flow forecast.