Typically, there are two major types of accounting, known as financial accounting and management accounting.
In this article, you’ll learn the ways in which financial accounting and management accounting differ. We’ll explain what each one is, the distinct purposes they serve, and how they both may be able to help your business.
What is management accounting?
A management accountant is responsible for analysing and providing cost information to a business’s internal management teams.
Management accounting (sometimes known as managerial accounting) is a field of accounting that exists for the purposes of organisational planning, high-level decision making and controls. The main purpose of management accounting is to support business leaders, so that they are well-informed in their decision-making.
A management accountant will usually conduct some of these tasks:
- Identify opportunities to boost profitability through the deployment of operational strategies.
- Deliver various highly detailed reports for internal teams.
- Create estimates and projections benchmarked by previous business performance.
- Focuses on the business’s future financial goals and expectations.
- Strategic planning, which involves collecting, analysing and summarising relevant data and other information to set realistic business goals for longer term profitability.
Good management accounting starts with best practice, find out what this means for your finance department in our handy guide.
What is financial accounting?
A financial accountant manages data collection for the creation of accurate and reliable financial reports to external parties, such as investors, regulators, creditors and other stakeholders that are not directly involved in the day-to-day operations of the business
Financial accountants serve as the backbone of report and statement distribution in and out of the business. Crafting this documentation usually consists of recording and summarising periodical financial activity from the business.
A financial accountant will typically handle these work duties:
- Curating a financial overview of the business.
- Monitoring the financial performance and health of the business.
- Maintaining a detailed financial record on reporting systems.
- Complying with all necessary tax and financial reporting requirements.
- Producing best practice financial reports, including cash flow statements, profit and loss and balance sheets.
Take a look at our guide: how to build a highly effective finance team: people, processes and platforms.
What is the difference between financial accounting and management accounting?
To clear up any confusion about financial accounting vs management accounting, you’ll find the key characteristics of both in this section.
Characteristics of financial accounting
- Reporting types: Financial accounting focuses on preparing financial statements for external use. Example reports may include balance sheet, income statement, cash flow statement, or statement of changes in equity.
- Financial accounting looks backwards: Recording past transactions and events is a key characteristic of financial accounting. This retrospective is summarised in financial statements at the end of specific reporting periods, typically quarterly or annually, to provide accurate snapshots of the company's financial position and performance over a specific period.
- Compliance and regulation: A financial accountant must comply with various regulatory requirements and IFRS established by governing bodies in Australia and New Zealand. Adhering to these standards ensures transparency, accountability, and consistency in your business’s financial reporting.
- An external audience: The primary audience for financial accounting information are external stakeholders, which could include investors, creditors, analysts, government agencies, or the public. These stakeholders can dissect this information to assess your company's financial health, profitability, liquidity, and overall performance.
Characteristics of management accounting
- Measuring internal performance: Management accounting assesses the performance of various segments, products, divisions, or projects within your business. Management accountants will use various methods to do this, such as cost-volume-profit analysis, variance analysis, and key performance indicators (KPIs). Business managers will then have all the information at hand to evaluate the efficiency and effectiveness of operations and make necessary adjustments.
- Management accounting is future-oriented: Unlike financial accounting, which primarily looks at the past, management accounting is more concerned with the future. Management accounting consists of budgeting, forecasting, cost analysis, and performance evaluation to assist management in setting goals, allocating resources, and evaluating performance against targets.
- Flexibility and customisation: Managers can tailor management accounting reports and analyses to suit the unique requirements of different departments, projects, or strategic initiatives within the business. Management accounting is generally more flexible and customisable when compared with financial accounting.
- An internal focus: Management accountants will usually be tasked with providing timely and relevant information to an internal audience, which will primarily be managers, executives, and department heads. The information generated is tailored to meet the specific needs of management for planning, controlling, and decision-making purposes.
A summary of the key differences between management accounting and financial accounting
Management Accounting | Financial Accounting |
Reports used internally | Reports used externally |
Will report on specific interest areas | Will report on business-wide performance |
Focused on future performance | Looks at historic performance |
Will use estimations | Is required to use accurate numbers |
Customisable and flexible based on managerial needs | Must produce information in accordance with accounting standards |
What are the similarities between financial accounting and management accounting?
Now that we have a better understanding of the differences between financial accounting and management accounting, let’s think about the similarities:
- Both types of accounting provide effective and accurate accounting information to stakeholders.
- Financial accounting and management accounting are both tasked with the preparation of an organisation’s financial reports.
- Qualified and experienced accounting professionals should be in both these roles to execute work effectively.
- Both accounting types make it easier for their audience to understand the costs of accounting periods and their organisation’s departments.
Will financial accounting and managerial accounting both work for my business?
In short, yes. Management accounting and financial accounting can work well in tandem.
A management accountant is mainly concerned with the potential of your business. They’ll extract information to influence business decision-makers in the areas of problem-solving, profitability and strategy.
A financial accountant is also essential to the management accounting process, because their retrospective focus, through accurate financial statements, can benchmark past performance to reinforce future decisions.
If you want to think more strategically in your business and use your finance teams to bring about this shift, why not check out our article: why finance teams should embrace change.
Conclusion
As we have delved deeper into the nuances of financial accounting vs management accounting in this article, we hope that you have seen how both branches play significant roles in the functioning and decision-making processes of businesses.
While financial accounting and management accounting are both vital components of the accounting function of a business, both have their distinct purposes and cater to different audiences.
If you’re reading this article, you may be thinking about accounting software, to enable which package is right for your business. If you’re not sure what accounting software is, our guide may be able to help you.
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