In the business world, accounting plays a vital role in understanding a company's assets and liabilities as well as how those factors impact its financial position. There are two main types of accounting: management accounting and financial accounting.
Financial accounting focuses on reporting an organization's historical transactions for external stakeholders such as other businesses, shareholders, and regulatory agencies. These records must be detailed and accurate so that outsiders can make a sound judgment about the company’s financial health.
Management accounting is more concerned with helping managers figure out how to best allocate resources within an organization. Most of the data collected by management accountants helps managers make short-term decisions about what is most profitable for their company, rather than provide long-term information about their company to outsiders like shareholders or regulators.
This article will help you understand the difference between these two types of accounting, show you how they work together, and teach you how they're used in the real world.
The specific purpose of financial accounting is to provide information to different people. Often, these are the people who are stakeholders in the company or organization, such as its managers, board of directors, or investment firm. Financial accounting provides this information by analyzing an enterprise's financial statements.
Financial accounting is unique because it's used for many purposes other than decision-making. For example, it can be used to calculate taxes and prepare budgets.
vs. financial accounting
Financial accounting is the process of recording, summarizing, and reporting economic events in a way that is appropriate for the needs of different people. It provides information about the performance of an enterprise by analyzing its financial statements.
Management accounting, on the other hand, is a subset of cost accounting and deals with providing decision-makers with relevant cost information. It can be used to make comparisons between what has been spent and what has been produced, where it was spent and how much it will take to produce more of something. It also deals with how long it will take for all costs to be amortized.
What is management accounting?
One of the major differences between financial accounting and management accounting is that management accounting deals with cost management for decision-makers. It has a wide range of tasks to include:
- making comparisons between what has been spent and what has been produced
- determining how long it will take for all costs to be amortized
- providing decision makers with relevant cost information
While financial accounting deals with revenues, expenses, assets, liabilities, equity and income statements. In other words, it deals with money transactions between a company and its customers or investors. The information from these transactions is placed into one of four aspects: assets, liabilities, equity or income statement.
Managers who want to make decisions about the future need accurate cost information which can be attained through management accounting. Management accountants gather this information by summarizing the following: operational data (total units produced), overhead costs (manufacturing plant expenses) and production data (units manufactured).
They determine where the costs are going and how long it will take for all costs to be amortized. All this data is then translated into a usable form. The difference between these two areas of accounting is that financial accountants talk about numbers while managers accountants talk about money amounts.
Difference between financial accounting and management accounting
It can be used to make comparisons between what has been spent and what has been produced, where it was spent and how much it will take to produce more of something. It also deals with how long it will take for all costs to be amortized.
The primary difference between these two areas of accounting is their primary focus. Financial accounting focuses on making economic decisions based on past performance. Management accounting is oriented towards making future predictions based on cost data.
Another difference would be that financial accountants are most often employed by companies or organizations while managers are usually employed by the same company, they oversee but may also work for other companies as well.
The skills required for each job can vary depending on who you're working with but management accountants typically have knowledge of budgetary control systems and their understanding of financial reporting standards makes them valuable employees in both public and private sectors.
The difference between financial accounting and management accounting can be best understood through their definitions.
Financial accounting covers things like income statements, balance sheets, cash flow statements, ratios, and many more—it's all about numbers. Management accounting includes forecasting costs, calculating profitability when making future investments or projects, analyzing how long it will take for all costs to amortize–this side of the world is all about words!
Both are very important when running a business but together they provide a complete view of an enterprise's performance. One provides the number while the other provides the story behind them.