Accounting as a discipline and practice is concerned with recording, estimating, organizing and summarizing financial and operational data (Garrison, Noreen & Brewer 2011, p. 34; Hilton & Platt 2011, p. 45). The financial information derived could be classified into financial accounting and managerial accounting. These two types of accounting have several aspects which distinguish one from the other.
The first of the differences involve user orientation. Financial accounting deals with providing information to stockholders, creditors, tax authorities and regulators who are outside of the company; whereas, management accounting deals with providing information to the company’s managers who direct and control the company’s operations (Garrison, Noreen & Brewer 2011, p. 33-34; Hilton & Platt 2011, p. 45). Although both groups of users rely on the same financial information, their perspectives vary according to their interests in the firm. For example, stockholders are interested to find out from the financial statements if they have acceptable returns from their investments; while creditors need to know if the company has the capacity to fulfill its financial obligations, while tax authorities need to know how much taxes are due based on the financial operations.
Second, the emphasis of financial accounting is on the financial consequences of past activities while management accounting is oriented towards using the financial data to make decisions for the future (Garrison, Noreen & Brewer 2011, p. 34). Financial accounting is more of a historical account of business activities whereas management accounting aims to project financial events that are yet to come.
Third, financial accounting focuses on objectivity and verifiability, while management accounting emphasizes relevance (Garrison, Noreen & Brewer 2011, p. 34). Relevance in management accounting means that the financial information should be applicable to the problem. For instance, being able to project the sales volume should indicate the budget required for purchasing inventory and the logistic expenses needed to handle such inventory.
Fourth, financial accounting emphasizes precision whereas managerial accounting stresses timeliness (Garrison, Noreen & Brewer 2011, p. 35). Accuracy down to the last centavo is held important in financial accounting. Meanwhile, managerial accounting depends on good estimates which are provided aptly so that decisions and the circumstances in which decisions are made contribute to the efficiency of plans or goals.
The fifth difference concerns the presentation of financial data. Financial accounting reports the summary of the entire company’s financial activities (Garrison, Noreen & Brewer 2011, p. 35). Contrastingly, managerial accounting looks into segments of financial information. For example, in management accounting, expenses in the product lines could be analyzed to identify which products may be prioritized and which products need to be removed from the product offers. The products weeded out are obviously those that are no longer profitable and may perhaps prove to drain the company’s funds.
Sixth, financial accounting also needs to comply with Generally Accepted Accounting Principles (GAAP) (Garrison, Noreen & Brewer 2011, p. 35). By doing this, external users are assured that the financial reports are made according to a common set of conventions so that the financial information is comparable with those of other firms in the industry and that fraud and misrepresentation are avoided. For management accounting, this aspect is not necessary as the users are internal.
The final difference is that financial accounting is mandatory while management accounting is compulsory (Garrison, Noreen & Brewer 2011, p. 35). External groups like the Securities and Exchange Commission and the tax authorities oblige the regular submission of financial statements from companies. In management accounting, a company may or may not practice management accounting as the option to apply management accounting in the company may be based on the company’s capabilities, orientation or practices.
Garrison, R, Noreen, E and Brewer, P 2011, Managerial Accounting, 13th edition, McGraw-Hill, New York, pp. 33 – 35.
Hilton, R and Platt, D 2011, Managerial Accounting, Global edition, McGraw-Hill, New York, pp. 45 – 46.