Financial Accounting vs Managerial Accounting

Among the careers in the finance field, financial accounting has been a popular choice for a number of years. It finds its roots in ancient Assyria, Babylon, Mesopotamia, and the Sumerian civilization. A definitive step in its evolution came much later, though, when in the late 15th century, an Italian monk named Luca Pacioli published his famous book “The Summa de arithnictica, geometria, proportion! et proportionalita”. This is said to have earned him the sobriquet of ‘the father of modern bookkeeping’ as well as being the first time that double-entry bookkeeping was described.

What is financial accounting?

This is essentially what we mean when we talk of accounting, and is in fact a particular branch of accounting. During day-to-day business operations, several transactions take place, and these are tracked through a balance sheet, a cash flow statement, an income statement, and other financial statements that give insights into how the operating performance of a company has progressed.

Across the world, several countries have their own — or follow particular established — accounting principles. The most well- known accounting principles among these are the Generally Accepted Accounting Principles, or GAAP, followed by financial accounting professionals in the US.

Is management accounting different from financial accounting?

Like chalk and cheese! Contrary to the latter that looks to prepare and present financial information for the perusal and analysis of entities external to a company, management accounting covers the identification, measurement, analysis, interpretation, and communication of financial information with the aim of helping managers to attain organizational goals. Management accountants are well qualified in the finance arena, typically holding a bachelor’s degree as well as top accounting certifications such as a Certified Management Accountant.

This points to the biggest difference between management accounting and other forms of accounting — the users. A management accountant essentially helps a user within the company to take better business decisions driven by the right data. This data comes from studying the costs — both fixed and variable — of the goods and services offered by the company as well as the revenues from the same. The data is rarely presented in the same form or highlighting the same parameters or variables to different internal users — recruiters could want to see how salaries offered have changed in absolute terms over the years, marketing leads may be interested in marketing spends and the resultant percentage changes in market share, and so on.

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

Both accounting types differ on more than one count. Here are the most significant distinctions:

Parameter|Financial accounting|Management accounting

Tasks|Preparing financial statements|Preparing analytical reports

Segments studied|Financial results and position of a business entity|Details of individual customers, geographical lines, products, product lines, or subsidiaries

Output|Aggregating financial information through financial reports|Analyzing products and functions in reports

Frequency of reports|Only at the end of a reporting period|As and when required by management

Purpose|Standardized reporting for external stakeholders to study business health|Strategic information for managerial decisions

Compliance requirements|GAAP, IFRS, local statute(s), or any other global standards|No regulatory framework mandated

In summation…

Financial accounting and management accounting are not quite two sides of the same coin. Their external and internal focus respectively sets them apart from each other. Both disciplines are important for the modern organization to keep its performance on track.

Investment & management accountants Writer, Adviser, Researcher and Investor.