What are the Differences Between Financial Accounting and Management Accounting?

The accounting profession dates back many years. It is said to have originated in the ancient eras of Assyria, Babylon, Mesopotamia, and the Sumerian civilization. The first formal step, though, came in 1494, when Luca Pacioli, an Italian monk said to be the father of modern bookkeeping, published his famous book “The Summa de arithnictica, geometria, proportion! et proportionalita”. This is said to have been the first instance of the double-entry bookkeeping system being described.

What is financial accounting?

What we commonly mean when we talk of accounting, financial accounting is essentially a particular branch of accounting. Here, the focus is on the myriad transactions that happen over time in the course of regular business operations. The output of these processes is in the form of financial statements such as the balance sheet, cash flow statement, and income statement, all of which cover the operating performance of a company over time.

A key aspect of financial accounting is its compliance with established accounting principles. Depending on the country, a company must comply with the requisite principles — GAAP in the US, for instance.

What is investment accounting?

A specialized type of accounting, investment accounting looks to maintain a record of all transactions related to institutional investments and to monitor the related custodian accounts. Reporting to senior management, the investment accounting team looks at separately-held portfolios and pooled endowments both. Investment accountants thus are typically employed by brokerage and asset management firms.

The work involves a much higher level of risk than, say, savings accounts at banks. The capital that investment accountants look at is put into goods, services, shares, or stocks that could appreciate in value with time, and offer greater returns in the process.

Is management accounting the same or similar?

Investment & management accounting are quite different. A management accountant identifies, measures, analyzes, interprets, and communicates financial information to managers such that the latter are able to attain organizational goals. How the work of investment & management accountants differs is that the latter focus on the goods and services offered by the company and the costs — fixed and variable both — and revenues of the same.

The key purpose of management accounting is to help users within the company in taking better and data-driven business decisions. What also is different about management accounting is that it does not follow the same format across companies — the production team might want percentage trends, the HR team could require trends in absolute salary values, and so on.

What are the main differences between investment and management accounting?

Investment & management accounting are distinct in several ways, of which the key differences are explained below:

Parameter |Investment accounting |Management accounting

Purpose| Strategic information for managerial decisions| Investment status updates for stakeholders

Tasks |Analytical reports |Recording and accounting asset investments

Output |Analysis of products and functions in reports|Part of balance sheet

Frequency of reports| As required by management|Provided with balance sheet for external shareholders; determined by management for internal stakeholders

Compliance requirements|No regulatory framework|IFRS, FASB, accounting standards guidelines, principles, and rules for internal decision-making

To conclude…

The domains that investment & management accountants work in are close but distinct. The choice for a company depends on its requirements, and for aspiring professionals, on their interests and career plans.