Financial accounting vs management accounting: What’s the difference?

What is financial accounting?

Financial accounting refers to the branch of accounting which produces records, summaries and reports of the financial activities and transactions related to a company. The main tasks involved in financial accounting are the preparation of financial statements and reports which convey financial information about an organisation to external parties such as investors, creditors and the authorities.

What is management accounting?

Management accounting is used to keep a business or organisation’s leadership informed about the financial situation and performance. This helps to support decision making and assess company performance over time, as well as providing some insight into what is likely to happen in the future. The reports produced by management accountants are used to support strategy and planning, goal-setting and decisions about the allocation of the business or organisation’s resources.

What are the key differences between management accounting and financial accounting?

The differences between these two types of accounting fall into a wide range of categories. While there are areas of overlap, the focus and goals of financial and management accounting are different.

Some of the key distinctions between the two branches are:

Systems

Management accounting tends to have a much stronger focus on internal systems and processes, and seeks to identify and analyse how to streamline these and maximise their efficiency. Meanwhile, financial accounting is more about the profitability and financial performance of a business.

Reporting focus

While financial accounting usually produces a standard set of reports, management accounting often requires a greater level of customisation and a wider range of formats. It’s crucial for accountants to have the right tools at their disposal, such as  finding a financial management software package which can produce customisable smart reports.

Aggregation

Financial accounting has a focus on aggregation, as it seeks to provide an overview of the finances of a whole company or organisation in the round. On the other hand, management accounting often drills down more into the details and might look at a business by department, by geographical region or by product line.

Efficiency

Both financial and managerial accounting should provide insights into the financial efficiency of a business. However, while financial accounting focuses on assessing and reporting on the performance and efficiency of the company, management accountants also have to identify inefficiencies and opportunities for improvement.

Timing

Financial accounting often involves working to specific deadlines, particularly when it comes to producing information in time for tax deadlines. Since management accountants aren’t bound by external deadlines, their work can be done over longer periods of time, or produced at short notice, depending on the requirements of their employer.

Proven information

A high level of accuracy and detail is necessary in financial accounting, because the reports and statements produced are used by external parties and often the authorities. Thus, all information must be clearly proven. Management accounting is different in that it often deals with forecasts and speculation, which are naturally unproven and less precise.

Standards

Financial accounting reports are held to very high regulatory standards because they have to be presented to external parties and authorities. Meanwhile, management accountants have greater flexibility, although they may still be asked to ensure their reports meet many of the same standards.

Time period

Financial accounting reports tend to cover set time periods, often over the financial or tax year, or the quarter. Management accountants, by contrast, may choose to use data from assorted time periods, whether a year, a month or ten years, to produce well-rounded analysis. Management accountants also include forecasting in their work, which is not necessary for financial accounting.

Valuation

The work of financial accountants involves the valuation of companies and their assets, while for management accountants valuation is less relevant. They are more interested in determining the productivity of companies and their assets.

Certification

Financial and management accountants often have slightly different qualifications and certifications. Those qualified to carry out financial accountancy are Certified Public Accountants, while those who can perform management accounting are Certified Management Accountants.

Pay levels

Management accountants are generally paid more than financial accountants, due to the more complex range of tasks they have to perform. However, as with all careers in accountancy, financial accountants are still well compensated.