Accounting is the most important part of any business organization.
It is the process of understanding, classifying, and summarizing the business transactions of an organization or company in monetary terms and plotting the results.
Keeping account books of the business transactions and deals made by a company is very important for the smooth running of the company.
Key Takeaways
- Financial accounting focuses on reporting financial information to external parties, while management accounting focuses on providing information to internal parties.
- Financial accounting is mandatory, while management accounting is optional.
- Financial accounting reports on historical financial data, while management accounting is future-oriented.
Financial Accounting vs Management Accounting
Financial accounting involves providing financial information to the shareholders and third-party individuals and organizations related to a company. Management accounting is a form of accounting that provides financial information, forecasts and solutions to the management of a company.
Financial Accounting provides financial information to the stakeholders, shareholders, and other third-party organizations and individuals involved with the company.
It is a crucial part of a business as giving fair and true information to the public and other organizations is mandatory by the government as well as international organizations for the operation of a company.
Management Accounting provides crucial financial information, forecasts and advice to the management of a company for more effective and efficient operation of the company.
It is an internal department, and the information provided by the management accounting is not disclosed to anyone outside the management of the company.
The information obtained by the Management Accounting department of a company is highly classified.
Comparison Table
| Parameters of Comparison | Financial Accounting | Management Accounting |
|---|---|---|
| Definition | Financial Accounting aims to provide financial information to the stakeholders and other third party organizations doing business with a company | Management Accounting provides financial information, advice, and forecast to the management of the company |
| Objective | To provide information about the company to outsiders | To assist the management in proper decision making for better functioning of the company |
| Type of information | Public information disclosed to the general public | Private information, highly classified and not disclosed to the general public |
| Legal obligation | Mandatory by law for the operation of the company | not legally obligated |
| Format | The specific format is maintained | No specific format |
What is Financial Accounting?
Financial Accounting is the department of a company that provides legal and financial information to the stakeholders, shareholders, and other third-party organizations and individuals that are involved in business with the company.
The information provided by Financial Accounting is disclosed to the general public as it is legally mandatory for the operation of the company.
Hence, the financial information obtained by the department is public information, such as the business transactions made by the company, revenue generated, etc. The information is summarized in financial reports and published.
Publishing of the financial information is mandatory and is done by the internal auditing of the company. The reports are based on various assumptions and principles such as historical cost, balance sheets, income statements, etc.
The financial reports are prepared every year to provide information on the yearly business done by the company. Some companies also provide quarterly and half-yearly reports.
The profitability, future aspects, future business deals, and other information related to the future operation of the company are not provided in the financial reports, as these are internal aspects.
Financial reports provided by Financial Accounting are used by external stakeholders and other parties to get a better understanding of the operation and decision-making of the company while doing business with the company.
What is Management Accounting?
Management Accounting is the department of a business organization that provides important financial information, forecasts, and advice to the management of the organization for more proper decision-making.
This is a crucial department of any business organization as the information provided by this department is very important for the efficient and effective functioning of the company.
The information provided by Management Accounting is highly classified as it includes the essential information required for decision-making about the functioning, financial, and cost accounting of the company, as well as forecasts related to the domain and market of the company.
Along with the information provided, the department also provides advice to the management for proper decision-making.
Hence, Management Accounting includes highly experienced individuals with years of experience and a lot of knowledge about the company and the market.
The information provided by Management Accounting consists of weekly, monthly, quarterly, and half-yearly financial statements, revenue reports, internal auditing, and many other factors.
Thus, thorough research is done by the Management Accounting to provide the financial information to the management.
The reports provided by the Management Accounting are sometimes not disclosed to the employees of the company as well. The Management of the company is the only body that can have access to the reports of the Management Accounting.
Main Differences Between Financial Accounting and Management Accounting
- Financial Accounting provides financial information about a company to the third-party organizations doing business with the company as well as the general public. Management Accounting provides financial information, advice and forecasts to the management of a company.
- The information provided by the financial accounting is disclosed to the public. The information provided by the management accounting is highly classified and not disclosed outside the company.
- The reports provided by Financial Accounting are structured in a specific format. There is no specific format for the reports provided by management accounting.
- The objective of financial Accounting is to provide company-related information to the general public. The objective of Management Accounting is to assist the management in better decision-making.
- Every company is required by law to form a Financial Accounting department. Management Accounting is an internal department and has no relation to the law.
- https://www.sciencedirect.com/science/article/pii/S0361368201000113
- http://eprints.lse.ac.uk/id/eprint/61228
- https://www.sciencedirect.com/science/article/pii/S0361368206001103
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This article presents a detailed analysis of the differences between Financial and Management Accounting.
Indeed, the depth of analysis is commendable.
The article lacks a critical examination of the limitations of both Financial and Management Accounting.
I agree, an exploration of the limitations would provide a more comprehensive view.
The comparison table makes it easy to understand the distinctions between the two types of accounting.
Absolutely, the tabular format is really helpful.
Very well written.
Great article. Very informative
I agree. The differences between Financial Accounting and Management Accounting are clearly explained.
The comparison of the legal obligations for Financial Accounting and Management Accounting is well articulated.
I don’t agree with the classification of information provided by Management Accounting as ‘highly classified’.
A well-structured and balanced overview of the topic.