Financial accounting and management accounting are two very important terms in the world of finance. Though both are the types of accounting used by companies, they differ from each other and are used for different purposes.
How do they differ?
Financial accounting is the collection, recording, classification, and proper presentation of financial information in such a way that, all external agencies such as income tax authorities, government, shareholders, creditors of a company can understand it easily.
From the data presented, these external agencies can easily understand what exactly is going on in a company. They can know the financial strengths and weaknesses of a firm.
On the other hand, managerial accounting is done for the better understanding of facts for the management of the company and not for any external agency. It is carried out only for the company management to know, where they should give more attention, to have better results.
Another significant difference between the two is that, financial accounting is mandatory whereas managerial one is optional. This is so because, audited financial accounts are to be submitted to the tax authorities, while managerial accounting work is referred only by the company management.
Therefore, financial accounting is always done by certified accountants, and the other type could be assigned to anyone in the company by the board of directors.
Another major distinction is that, financial accounting is done at the end of the financial year, whereas data derived from managerial accounting is presented as and when required.
Also, while financial type consists of only monetary aspects of the business, managerial type consists of some suggestions for the management from the accountants for improving the performance of the organization.
Another point to note is that, financial type does not provide profit details and cost details department wise or product wise, but as a whole. On the other hand, managerial type can provide department and product wise cost and profit details.
Many experts believe that, more than financial one, managerial accounting helps the company management in strategic decision-making, and planning future expansion plans.
However, many other experts differ on the usefulness of management accounting process. They think that, it is an added financial burden for organizations, as it requires software and more manpower for timely presentation of useful data.
In addition, though due to growing competition and changed times it has become a necessity, its recommendations may or may not be accepted by the board of directors, depending on how effective they are.
Another major thing to note is that, while fixed principles of accounting are followed in the financial accounting process, the same might not be completely followed in the other type.
Financial accounting is concerned more with what has already happened, whereas management accounting deals with what will happen in the near future.
Financial type, however, fails to deal with the behavior of costs which are imperative for cost control. The losses due to inefficiencies and wastage of goods and materials cannot be understood with the help of financial accounting.
Both these types of accounting are a must to ensure the stability of a company. As a leader of a company, you should supervise over the accounting job and see to it that, accounting ethics and high standards of professionalism are followed in this process.