This article on the difference between management accounting and financial accounting is specifically written in response to requests from newcomers into the world of accountancy who need some form of foundational information on the difference between financial accounts and management accounts.
I recall my early days in accounting whenever I receive emails asking for some clarification on certain topics in accounting. Back then, I seize every opportunity of learning that presents itself – I still do that till date because I believe that learners own the world 😊.
I always provide the requested clarification each time learners asks but would like to share these thoughts here so that I can easily point them to this accounting blog post dealing on the topic of ‘differentiate between financial accounts and management accounts’
This is because I don’t want to deny zealous learners the opportunity of learning from me whenever they so desire.
Eight (8) differences between a management account and a financial account
Below are eight differences between management accounting and financial accounting worth knowing by anyone who uses accounting information.
- What the law says (legality): the preparation of financial accounts is statutorily required for public entities. Management accounting on the flip side is prepared at the discretion of management.
- Time coverage/ period covered: while the financial accounting system aims to give stewardship account of what has happened in time past, management accounting system aim to produce information that would enable data driven leaders make intelligently informed future decision.
- How often (frequency): management accounts can be published as at when needed – the massive impact of business technology has even added more flexibility to how often management accounts can be prepared for modern managers in their day to day running of an entity. This is unlike the financial accounts that needs to be prepared both annually and semiannually.
- Accounting standards: financial accounting information contained in financial statements must adhere to one GAAP or the other. One of the benefits of following accounting standards is for uniformity and consistency across the board. Management accounts on the other hand does not necessarily need to meet or follow the provisions of an accounting standard. However, cost-benefit common sense entails that it will make economic sense for businesses not to put in double efforts doing one thing. Aligning the preparation of management accounts and financial accounts as close as possible helps to ensure that much work would not be required when making the necessary accounting adjustments that would take an internally prepared sets of accounts to what is suitable for public consumption.
- Audience: another subtle difference between management accounting and financial accounting lies in the target audience that both sets of accounting information aims to satisfy. While there may be some overlap here, financial accounting takes care of the informational needs of users of accounting information at large while management accounting aims at satisfying the decision-making needs of the managers.
- Scope: while financial accounts only aim at those quantitative figures, management accounting can incorporate some soft elements specifically designed for the unique need of an entity. This is possible because of the fact that no law or accounting standard dictates what should be and what should not be in management accounts.
- Focus on segments: Also, while the scope of financial accounting covers the business as a whole, management accounts can be prepared for a segment of a business just to gain desired insight. Although financial accounts can have segmentation accounts within it, it cannot be prepared as a standalone financial account.
- Structure: just like there is no accounting standard guiding the preparation of management accounting, there is no stated structure that must be followed by preparers of management accounting information. That said, this however does not give business accountants unbounded freedom to prepare whatever that they so desire. Tenets of understandability, usefulness and comparability should be the watch words of accountants that are charged with the preparation of management accounts.