Definitions:
Financial Accounting:
Financial accounting is a branch of accounting that deals with the recording and summarizing of financial transactions and presenting information in form of financial statements that reflect a fair picture of financial health of a business.
Management Accounting:
Management accounting refers to such accounting which helps the management of a company to make timely, well-informed and reasonably accurate decisions in order to effectively administer day-to-day business activities.
Difference between financial and managerial accounting:
The main difference between financial and managerial accounting is given below:
1. Reporting:
Financial statements are produced in result of financial accounting. These statements present the financial viability of a company and are prepared according to the guidelines of International Financial Reporting Standards (IFRS’s) and Generally Accepted Accounting Principles (GAAP’s). The reports prepared are statement of profit or loss, statement of financial position, statement of cash flows, statement of changes in equity and disclosure notes. Management reporting does not have any particular format. The management of the company can formulate and edit formats based on their ease and specific requirements of the business. These reports include costings, budgets, feasibilities, forecasts, sales reports, internal audit reports etc.
2. Purpose:
The sole purpose of financial accounting is to report on the financial situation of the company. These reports only reflect the financial status of a business. Management accounting aims to improve business processes and operations, by minimizing deficiencies, removing bottlenecks and presenting solution in order to enhance business capacity.
3. Data and Information:
In financial accounting, most of the data that is used is of financial nature. The main reason for this is that the primary focus is to report only about financial aspects of the company. However, management accounting makes use of both financial as well as no-financial data in order to extract relevant information and generate reports.
4. Users:
The primary addressee of financial accounting are the shareholders. The reports generated by financial accounting are also used by other stakeholders like creditors, potential investors, tax authorities etc. to make well-informed decision. The main addressee of management accounting is the internal management of the company as the data extracted is only used for the internal decision making of the company. This data also includes confidential data related to business.
5. Statutory Status:
Management accounts are normally prepared on a monthly basis. These accounts are not mandatory by law but are important to manage the business. Financial accounts are prepared on a yearly basis. These accounts or reports are mandatory by law. These are prepared according to the guidelines of IFRS’s and GAAP’s with some exceptions based on the jurisdiction. The financial reporting regulations are stricter for public listed companies.
6. Scope:
Financial accounting covers the whole organization. The content of financial reports is based on all areas of business and they present the overall financial situation of the business. While management accounts are prepared for specific business areas. For examples in the same organization, management accounts prepared for sales department may not be useful for the human resource department etc. Management accounts are therefore more detailed and precise.
Conclusion:
Preparation and publication of financial reports are very important as this process is statutory by law. These reports are not only published but also annually audited by independent firms that submit an audit report on the fairness of these reports. In this way, shareholders of the company can keep a check and balance on the directors of the company that are acting as their agents. The management accounts on the other hand are only good for offering solutions for the business processes. These accounts are vital for the management for controlling the entity efficaciously.
