What the difference between financial accounting and management accounting

University Degree Business and Administrative studies

Accounting as a profession has really developed over the years. According to Hendriksen (1977), accounting records concepts can be traced as far back as the Roman and Greek periods. According to the American Institute of Certified Public Accountants (AICPA), is defined as: “The art of recording, classifying, and summarizing in a significant manner, and in terms of money, transactions, and events, which are, in part at least, of financial character, and interpreting the results thereof.” financial accounting and management accounting appear in the contemporary society, which are two relatively new branches of accounting. This essay will explain the main difference between financial accounting and management accounting.

There are five differences between financial accounting and management accounting

Firstly, the principal objectives are different. Financial accounting combines accounting knowledge and finance knowledge, which mainly focus on periodic reporting of accounting information. The principal objective of financial accounting is a stewardship of business for benefit of shareholders, government agencies and other parties. However, management accounting contains accounting knowledge and management knowledge, which based on the accounting information to identify, measure, analyse, interpret and communicate information for the pursuit of an organization’s goals. It seeks to improve economy, efficiency and effectiveness of operations, which aims at helping managers within ...

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There are five differences between financial accounting and management accounting

Secondly, the time horizons of financial accounting and management accounting are different. Financial accounting is predominately based on past transactions and events. One of significant convention is the assertion of the historical cost concept. Nevertheless, management accounting not only consider the past cost concept, but the present and the future that affect the operation of company.

Thirdly, the report recipients are different. There is statutory requirement for companies to prepare annual financial statements. The annual financial statements which includes the profit and loss account, balance sheet, statement of equity and cash flow statement, which reveal the monetary performance and value of the company. The report recipient of financial accounting is biased in favour of external the shareholders and government for tax. However, the report recipients of management accounting are internal party like directors and company managers.

Fourthly, the outputs are different. The central outputs from financial accounting are audited financial statements such as profit and loss account, balance sheet and cash flow statement. However, the outputs from management accounting should detail monthly and annual management accounts, which cold show results by product and function ad hoc reports.

Fifthly, the regulate frameworks in financial accounting l and management accounting are different. The financial accounting framework concept in must lie down by the accounting standards board that looks like GAAP, which plus statutory requirements of the companies’ acts. However, the framework of management accounting need not prescribe, although the guidance and formats of CIMA Terminology should follow in most organisations.

In conclusion, as detailed work in contemporary society, financial accounting and management accounting appear. Five differences between financial accounting and management accounting, which are the principal objectives, the time horizons, report recipients, outputs and the regulate frameworks. In the future, it might that more and more branches in accounting appear.

Reference:

Hendriksen, R (1977) Accounting Theory, Irwin Professional Publishing; 5 Sub edition (22/10/1991). Isbn: 978-0256081466
The American Institute of Certified Public Accountants access in 02/10/2010)