Financial accounting is more concerned with providing relevant financial information to external stakeholders like investors, government, creditors, banks and so on. Investors often consider financial information as a basis to evaluate performance and make investments in a particular company.

Management accounting is concerned with providing information to internal stakeholders like managers to make informed business decisions. Since management of any company has four basic functions of planning, organizing, directing and controlling, management accounting information helps them in better planning, arrangement and allocation of resources, implementation of better control, cost control measures and so on.

Let us Study the Differences Between The Two:

a)  Period:

Financial accounting focuses more on events that have already taken place, that is, it presents information for a particular period and at the end of that period. In general a period of 12 months is considered. Management accounting is more future-oriented. Managers use information to make decisions for future. There is no specific period of reporting in this case. Information may be extracted and used for analysis as per business requirements.

b)   Information Source:

Financial accounting information generally comes from the data recorded for various events and transactions. Management accounting information on the other hand is generated and pooled from various sources within the organization.

c)   Compliance:

Financial accounting reports are prepared in line with Generally Accepted Accounting Principles (GAAPs) or any other norms that may be prescribed from time to time. Management accounting reports on the other hand are prepared without reference to any such accounting principles.

d)   Reliability Versus Relevance:

Since financial accounting information is meant for external users, reliability and accuracy becomes the core focus while preparing financial accounting reports. At the same time, precision of information presented is required. On the other hand, in case of management accounting, since information is required for decision making, timeliness and relevance of data receives prime importance.

e)    Mandatory Versus Non Mandatory:

Financial accounting reports are mandatory for any organization whereas management accounting reports can be generated as per the discretion of management. Only information relevant to decision making can be used.

f)   Scope:

Financial accounting reports provide a summarized picture of financial position of a company whereas management accounting reports can be prepared separately for each division, department, process, product, customer and so on.

g)   Monetary Versus Non Monetary:

Financial accounting is concerned more with monetary information whereas management accounting takes into account both monetary and non monetary information such as productivity.

h)   Audit:

Financial accounting reports are required to be reviewed and audited by an independent external body. However there is no such requirement for management accounting reports.

i)    Usage:

Financial accounting reports are generally used to study various factors like profitability over a period of time, financial stability, ability to meet short term obligations (liquidity) and ability to survive in the long run (solvency). Management accounting concepts like marginal and standard costing can be used for the purposes of making decisions like whether to make or buy a product, what measures to take in case there is any variance between targeted and actual sales, costs, overheads and so on. Tools like just in time (JIT) can be used for inventory management, cost reduction and improved efficiency of operations.

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