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Management Accounting vs. Financial Accounting

Posted by Thai Pham on

Since the early days, Management Accounting has played a critical role in helping executives to make impactful decisions. However, many people have easily mistaken Management Accounting for "Financial Accounting". When you clearly understand these two concepts, you will see that they have obvious fundamental differences.

Read more: Why Management Accounting is Essential for Sustainable Success

Management Accounting in comparison with Financial Accounting

What is Management Accounting?

Management accounting (also known as managerial accounting) examines the events occurring in and around the business while considering the needs of the whole organisation.

According to the Institute of Management Accountants, Management Accounting requires collaboration in decision making, performance planning/management, and provides expertise in financial reporting and auditing, as well as assisting management levels in the development and implementation of the organisation's strategy. "

The Chartered Institute of Management Accountants described Management Accounting as an information analysing tool to support business strategies and promote sustainable growth.

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In Management Accounting, managers use accounting information to better inform themselves before deciding on the issues in their organisation, helping to manage and implement the control functions.

In the past, there was rarely any change in the practice of Management Accounting despite the radical changes in the business environment. Therefore, accounting institutions were encouraged to apply the market practice to the accounting theory. Since 1993, professional accounting institutes have begun to devote more resources to the development of Management Accounting.

Read more: Accounting Software for Nonprofits: a Case Study of Infor SunSystems

Scope, Practice and Application of Management Accounting

Management Accounting is applied in various industries. The specific functions and rules may vary by industry. In details, it is actually extended to the following three areas:

  • Risk Management: Contribute to building frameworks and practices to identify, measure, manage, and report risk for achieving organisational goals.
  • Strategic Management: Enhance the role of managerial accounting as a strategic partner in the organisation
  • Performance management: Develop business decision making and performance management

As The Institute of Certified Management Accountants (CMA) stated: "A management accountant applies their knowledge and expertise in preparing and presenting financial information and decisions to support in policy formulation and control of commitments."

Read more: Factors to Consider when Choosing Accounting Software (Part 1)

The differences between Financial Accounting and Management Accounting

Financial and Management Accounting are both important tools for a business but serve different purposes. Businesses use accounting to determine future action plans, and review past and current performance. The investors are not involved in the day-to-day business operations but are concerned about their investments, while managers need information to quickly make daily business decisions, which leads to the fact that Managerial and Financial Accounting have different subjects.

Specifically, Financial Accounting is used to present the financial health of an organisation to its external stakeholders. Directors, shareholders, financial institutions and other investors are the subjects of the financial accounting reports. Financial Accounting presents a specific time period in the past and allows the readers to see how the enterprise has performed.

On the other hand, Management Accounting is used by managers to make decisions related to the day-to-day operations. It's not based on performance in the past, but on the current and future trends, which may not yield accurate numbers and figures. Because managers usually need to make decisions in a short period of time in a uncertain environment, management accounting relies heavily on market forecasts and trends.

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The main differences between Management Accounting and Financial Accounting can be summarised in the table below:

 

Management Accounting

Financial Accounting

+ The subjects of reports

Only the manager(s) in the organisation; presented internally; necessary for managers

Shareholders, creditors and public authorities; for outside parties; important for current and potential investors

+ Accounting information

Primarily forward-looking, model-based with abstract level to support common decision-making; calculated in reference to the needs of the manager(s)

Historical, case-based; calculated by reference to common accounting standards

+ Featured

Provides detailed information and analysis of products, individual operations, units, factories, operations and missions

Focuses on the company as a whole

+ Statistics

More of a guess or estimate

Precise and must adhere to Generally Accepted Accounting Principles (GAAP)

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Topics: Financial Accounting Management Software, Financial consolidation, planning and reporting

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 Rick Yvanovich
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