This article has a brief overview of the differences between financial accounting and management accounting systems. Many people have been unable to distinguish between the two concepts. Firstly, let us first understand the meaning of the term accounting.
Accounting can be defined as the system of collecting, analysing, summarizing, and reporting financial information about a business. This involves money, assets or any other resources that a business transacts. Business accounting as known today, involves both financial and management accounting. There is a similarity between the two, but still there exist some differences as well.
The first difference is based on its format or structure of presentation of information. Financial accounting is comprised of a single unified structure of exhibition. This means that all the information related to the enterprise of the business is staged in a uniform manner. Financial accounting has three basic financial statements. They include; profit and loss account, balance sheet and statement indicating changes in financial position. Accountants are responsible for the balancing of the statements.
The financial statements are usually meant for the people outside the organization. This includes the government, creditors, shareholders and the general public at large. This group of people gets the reports not only from the organization but also from other arms. Therefore the financial accounting system is structured in a uniform fashion.
Conversely, management accounting deals mainly with the in-house management of the organization. The accounting statements are used internally, therefore they vary in structure from one organization to the other. The variation depends on the requirements and the circumstances of each specific organization or individual.
The other difference is founded on the accounting principles. Financial accounting is arranged and prepared in line with the Generally Accepted Accounting Principles (GAAP). Financial statement preparation following GAAP structure is made on the basis of norm and the general guidelines as given by the law.
Management accounting is an in-house requirement and the information is intended for the exclusive use of the management only. Outsiders are not given the privilege of accessing this information hence the statistics, facts and figures can be formulated as the management wants.
The third difference is based on the statutory requirement of accounts preparation. Since financial statements for financial accounting are prepared solely for people outside, the law requires every organization to present such documents. The presentation of such documents is a statutory obligation that every organization must adhere to. In management accounting, the law has no interference with organization accounting management systems.
Organizations normally employ the two systems in their management. Financial and management accounting systems are all intended to run the organization smoothly. Accountants play a major role in the two systems such as preparation of the statements.