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What is the Difference Between Financial and Management Accounting?

Osmand Vitez
Osmand Vitez

Financial and management accounting each have a specific purpose, although both methods use the same financial information from a company. Companies will often use both accounting types even though distinct differences exist between the two. Financial accounting focuses on outside users, has set reporting periods, allows for general purpose uses, includes aggregate reports, and must follow national accounting standards. Management accounting has internal users, requires infrequent reporting, focuses information for future decisions, pertains to specific parts of the company, and includes only relevant data.

Most individuals think of financial accounting when reviewing a company's financial information. This is mainly because publicly held companies must release information to the public, including the financial accounting statements known as the income statement, balance sheet, and statement of cash flows. Other financial information may exist on special reports, such as depreciation schedules, loan amortization, and equity financing schedules. These reports are typically released each month, with quarterly reporting more important as the company bases its earnings of this information.

Woman holding a book
Woman holding a book

When individuals compare financial and management accounting, they may have a harder time understanding the latter, as it is quite different. Management accounting reports are not frequent and do not need to follow any standard statement methods. This results in companies being able to create whatever reporting process they deem necessary. Although the figures are the same in financial and management accounting, the purpose is different, giving companies the ability to use management accounting as they desire.

Although management accounting does not carry specific regulations, companies must ensure their measurements are reasonable. For example, attempting to allocate costs that do not relate to the production process is generally not allowed. This allows a company to avoid expensing these costs and increasing assets. The end result would be higher income reported by the company, which violates the standards under financial accounting principles. This represents one of the more important links between financial and management accounting.

The focus between financial and management accounting is also different. The former focuses on reporting the net income and profit a company earns from business operations. Management accounting often focuses on internal cost controls. If a company cannot control costs properly, each product produced cost more money. This requires the company to raise prices or reduce costs, as low margins are typically not sustainable. The ability to mesh the two accounting systems together is often an integral process in successfully running a business.

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