Financial Accounting and Management Accounting – Similarities and Differences

Financial accounting and management accounting play an important part in accounting information system. They co-exist in enterprise production and operation of management, constituting the modern enterprise accounting system together. Much information which management accounting required is from financial accounting, while financial accounting also put the established budget, standards organizations, and such daily accounting data from management accounting as the basic premise.

Management accounting is used primarily by those within a company or organization. Reports can be generated for any period of time such as daily, weekly or monthly. Reports are considered to be “future looking” and have forecasting value to those within the company.  Main function of management accounting in the enterprise is to establish a variety of internal accounting control system and provide internal management needs of a variety of data and information at the aim of improving operational efficiency and effectiveness.

Financial accounting is used primarily by those outside of a company or organization. Financial reports are usually created for a set period of time, such as a fiscal year or period. Financial reports are historically factual and have predictive value to those who wish to make financial decisions or investments in a company.

However, the reality is that financial accounting and management accounting has been completely separated by an increasing number of companies, which according to their own accounting methods to double account the data at the aim of external reporting and internal management. It is hard to achieve information sharing between the two sets of data, resulting in waste of resources and duplication of effort.

Therefore, companies should integrate financial accounting and management accounting effectively together, and give full play to the function of accounting information system to enable enterprises to obtain the dual needs of management and finance at the lowest financial cost.

Similarities Between Financial Accounting and Management Accounting

Financial accounting focuses on external services, but internal services is also included. Information which financial accounting provided on the funding, costs, profits and other information is very important for business management. In particular, financial statements can comprehensive and reflect all aspects of enterprise’s financial position and operating results. Study of the financial statements can grasp the overall situation of the enterprises, managers must first be aware of the overall situation, so that guide enterprises to continuously move forward. Therefore, managers must pay close attention, and be very concerned about the information provided by financial accounting. At the basic of the analysis of financial accounting, the plan could be developed to enhance control and make a scientific decision, how to further improve management and increase economic efficiency could also be studied. So we can not say financial accounting is just the external services, not domestic service, we can only say that the financial accounting focuses on external services.

Management accounting focuses on internal services, but it also contains external services. Investors and creditors concern about the enterprise’s financial position and operating results. In order to improve the enterprise’s financial position and operating results, precondition can only be based on strengthening internal management and improving the work quality and effectiveness at the aspects of production and management. In this regard, management accounting contributes a lot to correct business decision and timely provision of useful information. At the same time, investors and creditors in their decision-making also need to know a number of economic information provided by management accounting, which have important reference value when they make the right judgments and policy decisions.

Management accounting must obtain a variety of information from the different channels for planning and control of production and business activities, such as financial information, statistics, business accounting information and other relevant information. The most basic of which is financial information. For financial accounting has a fixed set of procedures and methods. Information will formed according to some time production and business activities and their results through the registration books, weaving statements, etc., which is not only for external use, but also for internal use. Management accounting can be developed based on financial information, making management accounting information to facilitate the regulation, control and decision making.

Functions of accounting are accounting and supervision. Management accounting and financial accounting have agreed to be subordinated to the general requirements of a modern enterprise accounting, which means the users of accounting information provide relevant information, to achieve enterprise internal objectives and meet the requirements outside the enterprise. So the ultimate goal of financial accounting and management accounting are the same.

Both of financial accounting and management accounting are faced with self-improvement and development. They have to confront the reality of a common problem: how to use modern computer technology to collect, process, store, transmit and report the accounting information; at the same time, they need to handle the demands of modern management properly according to the organization and implementation of accounting management .

Differences Between Financial Accounting  and Management Accounting

Financial accounting and management accounting is two branches of the modern enterprise accounting. The most fundamental difference between them is information for internal decision-making or external provision for decision-making, but the two are interrelated and mutually complementary and mutually complementary relationship.

1. The Focus is Different

Financial accounting provides services to outside stakeholders through the record, classification, aggregation of everyday activities of companies and preparation of financial statements and other methods. Having been reviewed and notarized by certified public accountants, corporate financial statements are considered to be reliable by stakeholders, and they can accurately understand the enterprise’s financial position and operating results and make decisions according to the financial statements. From this perspective, the financial accounting is focused on export-oriented services. Precisely because of this character of the financial accounting, it is often called the external financial accounting.

Management accounting provides relevant economic information using a variety of specialized technical approach to the business managers at all levels so as to facilitate goal determining, decision making, preparation of plans, tighten the screws and conduct performance evaluations. From this perspective, management accounting is focused on in-house services. Therefore, people often call management accounting the internal accounting.

2. Management Accounting is not bound by Accounting Standards

In order to obtain the confidence of external parties and protect their interests, there must be strict standards and basis for financial accounting, they are the “Accounting Standards“. As the certified public accountants review corporate financial statements, they should focus on examining whether the financial statements comply with generally accepted accounting principles or the relevant provisions.

Management accounting is different because it is primarily for internal management services, hence, they are not constrainted by generally accepted accounting principles or accounting system. Managers at all levels can use a variety of technical methods of management accounting to obtain information, what kind of information is obtained depends on the type of decision-making, business type, and management needs.

3. Management Accounting Focuses on the Future, while Financial Accounting Describes the Past

External financial statements based on historical cost basis, and reflects what happened in the past. The information provided in this report is required to be true and fair, and only accurate and reliable financial information can obtain the confidence of external stakeholders.

Management accounting is required to predict the future and provide a variety of forecast information. At the same time, management accounting uses a more extensive concept of cost in decision-making analysis. Sometimes information is provided on the basis of estimates, to predict the future and make decisions on the basis of future, of course, this information can not be very precise, but the management accounting attaches great importance to the timeliness and effectiveness of information, and only to provide timely and effective information can they enable managers to seize the opportunity to make decisions. The company’s success depends largely on the timely and correct decision-making.

4. Financial Accounting has Accounting Period

Financial accounting is a past-oriented, the financial statements is based on the record books and is prepared for a certain period, such as annual, quarterly or monthly . The financial statement is a summary of the financial position and operating results within a certain period.

Management Accounting is future-oriented, and can prepared a variety of reports according to the needs of management, from practice, there is no monthly, quarterly, annual limits, as long as management needs, it can be by the hour, the day basis, it can be prepared on the basis of a period in the past, yet can also be a period in future.

5. Financial Accounting is Overall, Management Accounting is the Balance between Overall and Local

Financial accounting reports provided information on the summary of enterprise. This report deals with the entire enterprise as a whole, the financial accounting reports generally do not involve localized issues of internal departments, and units.

Management accounting provided detailed information in the report, this report not only reflects the overall situation of the enterprises, but also that of the local businesses, such as ministries, offices and other circumstances.

Although the two kinds of accounting are somewhat different in internal services, external service issues, it is also interrelated, this interaction is based on that both kinds of accounting should service for management.

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