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.
Financial Accounting vs Management Accounting
The main difference between Financial Accounting and Management Accounting is that Financial Accounting intends to provide financial information about a particular company to the stakeholders and third paryt organizations doing business with the company. Management Accounting on the other hand assists the management of the particular company in decision making by providing quantitative and qualitative information to the managers.
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 are mandatory by the government as well as international organizations for the operation of a company.
Management Accounting provides crucial financial information, forecasts as well 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 Financial Accounting and Management Accounting
| 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 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 as well as 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 the Management Accounting generally 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 for providing 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 part organizations doing business with the company as well as 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.
- Objective of the Financial Accounting is to provide company related information to the general public. The objective of the 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.
Conclusion
Accounting is one of the fundamental parts of any business organization. For the smooth operation of a business organization or a company, the accounting department has to be proper, with highly skilled individuals.
Both Financial Accounting and Management Accounting are crucial parts of a company. The main objective of Financial Accounting is to provide financial information to the stakeholders as well as the general public.
This is a legal obligation, as it is required by law for every company to provide fair and true financial reports to third-party organizations as well as the general public doing business with the company.
Management Accounting is responsible for providing proper financial guidance to the management of a company for effective decision making.
Thus Management Accounting is directly responsible for the growth of a business organization.
References
- https://www.sciencedirect.com/science/article/pii/S0361368201000113
- http://eprints.lse.ac.uk/id/eprint/61228
- https://www.sciencedirect.com/science/article/pii/S0361368206001103