A substantial portion of the population finds accounting a very dry, boring subject; one with the capacity to draw figurative blinders over one’s eyes, rendering them unable to absorb anything related to facts and figures.
On the other hand, there is a select segment of the population who revel in their understanding of such concepts and mentally play numbers games on their commute, just for fun.
Is that you? If so, you might know what differences there are in management versus financial accounting.
Your Superprof is in the know too, and in this article, lays out particularities specific to each discipline before contrasting the two.
What is Management Accounting?
Briefly stated, Management Accounting is the function of providing a business’ management team with cost information so that they can plan future business developments and make decisions regarding the business.
The Chartered Institute of Management Accountants has an expanded definition of what management accounting is, but the abridged version suits for our purposes.
Whereas one would think that business executives would be concerned with such data – they are a business’ decision makers, after all, it is, in fact, the mid-level managers’ job to process such data and present it to their higher-ups.
Let us now paint the scenario of a national company that endeavours to go global.
Among the considerations involved in doing so, such as legal and environmental, the financial expenditures required and the impact on the company’s operating costs and even their net revenue generation are of primary importance.
In fact, the purpose of management accountants is not always so dramatic and far-reaching.
Suppose an auto manufacturer needs to estimate the cost of retooling their production line for the latest proposed model.
It would not necessarily be executives that are concerned with the nuts and bolts of said change (pun intended).
The floor managers would be much more knowledgeable of what exactly would need to be altered for the new production to roll out and, once the management accountants project their estimated figures, managers would meet with the executives to present those findings.
Whereupon the executives may dispute some costs, require trimming costs or, conversely, approve the expenditures outright.
Most likely, said managers would be tasked with keeping costs as low as possible.
Naturally, it would not be the managers themselves who roll up their sleeves and flick beads on abaci – or the modern equivalent thereof.
Thus it makes sense that an entire division of corporate finance and accounting is dedicated to producing such a financial report and enlightening managers on such a financial statement analysis.
Whether such an accountant works in-house or those accounting systems are contracted out to independent accounting firms depends on the nature of the business.
For our enterprise that plans to go global, most likely an audit by an accountant external to the company would be called for.
On the other hand, due to the proprietary nature of manufacturing, it would be more likely that that automaker would have accountants on-staff specifically for such managerial accounting.
The critical factor that distinguishes a management accountant from a public accountant is the secrecy of the data they compile, and that it stays in-house.
In other words, your data compilation and analysis will not be published in financial statements, or be released to creditors, investors or tax authorities.
Other functions a management accountant fulfils are:
making financial forecasts based on data
analysing risk and finding opportunities for financial growth
identifying trends and opportunities for improvement
arrange funding and financing of a discrete operation
create/maintain a company’s financial system
enforce budget compliance within various departments.
Now that we are clear on the roles and functions of this corporate financial officer, let us look at the particulars of financial accounting.
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What is Financial Accounting?
Financial accounting is a blanket term given to the processes of recording, summarising and reporting a company’s financial data.
While financial accountants keep track of every single company expenditure, be they internal or external to the company, their analyses are not only reported to company management.
Such reporting goes further, to entities outside of the corporation, such as shareholders, investors and tax authorities.
They also report, or at least make their books available to business/government regulators.
Whereas the principles of accounting remain the same regardless of whether management accounting or financial accounting is involved, because of its internal scrutiny, financial accounting is done according to a certain standard.
The generally accepted accounting principles (practice) UK represents the standards of accounting published by the UK’s Financial Reporting Council.
Most countries have similar standards, and they must further conform to the International Financial Reporting Standards should they trade on the global stage.
In fact, in the US, which has its own nationally recognised accounting standards that report to the Securities and Exchange Commission, companies are moving away from their national programme to embrace the international standards.
Company financial accounting is what laypersons know as financial statements. They embody and present the five main classifications of company financial data.
Assets: those things that bring/indicate a company’s value
liabilities: those things that may cost a company
expenditures: said expenses could be assets or liabilities
equity: ownership interest; it could also mean as-yet undisbursed shareholder profits
revenues – what is often called the bottom line: how much profit a company has made after everything has been calculated.
As a shareholder, one may not be interested in the smallest detail of every financial transaction the company undertakes but executives and governing bodies would avidly scrutinise such balance sheets for any instance of fraud or waste.
The American president’s recent rollback of such oversight regulations has some investors worried: by only reporting every six months, companies have a much greater license to misrepresent accounting information and financial performance!
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The Bottom Line: Differences Between Cost Accounting and Financial Accounting
The fundamental difference between the two accounting concepts is that the former is accounting used internally for business planning and strategy and the latter is used in external reporting.
Those external reports may include copies to tax agencies, oversight committees and to shareholders.
Whereas managerial account reports are not required by law, companies are legally required to furnish periodic reports on the company’s financial health and solvency to investors and to government regulators.
Managerial accounting happens on an as-needed basis – see the examples of retooling an assembly line or expanding into international markets.
By contrast, financial information reports are required in specified instalments: annually, semi-annually, quarterly, monthly and, for some businesses, even weekly!
There is no specific format required present managerial accounting data. However, financial accounting must be presented in a specific format, to make for easy comparison with other companies.
In management accounting, segment reporting pertains to individual sections of the business in addition to the business as a whole.
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Financial accounting pertains to the business as a whole and may include the performance of individual sections if such data is relevant to changes from past reporting.
The focus of managerial accounting is on the future; it takes today’s data and forecasts future financial events: budget shortfalls and/or excesses, for example.
A further focus on this type of accounting is on planning and strategising: based on potential future revenue, a business leader can plan for expansion or business diversification.
Conversely, financial accounting’s focus is on the past in comparison with today’s performance.
The term SPLY, meaning same period last year, features prominently in assessing business growth and earnings.
Did the business generate as much or more revenue this time last year?
If last year’s bottom line is indeed flatter than this year’s, the company can claim growth. However, if this year’s balance sheet revenues are lower than this time last year, the company may report a loss to their shareholders.
Finally: whereas there are no rules pertaining to how, when and in what format a managerial accounting report should be rendered, there are very specific regulations governing financial accounting reporting.
Those standards are set forth by either the aforementioned Generally Accepted Accounting Principles or by international accounting standards, also known as IFRS.
For further differences between the two types of business accounting, you may refer to this insightful article.
If you are chasing an accounting degree and wondering what area of accounting and finance you might specialise in, these two specialities might pique your interest.
If you are already employed in business accounting or accounting management, perhaps our outlining the differences between these two types of accounting can help further your career.
You may be interested to know that, generally, those involved with management accounting processes tend to be assigned more projects, which means more chance to present the financial conditions of various aspects of the business.
You may also stand a better chance at promotion as a managerial accountant!
However, financial accountants are pretty much confined to the same type of financial analysis and reporting, cycle after cycle.
Here, the excitement comes from spotting anomalies and investigating them.
Whichever type of accounting you prefer, you can be sure that you won’t soon be replaced by an algorithm; your skills are far too vital to trust them to a computer!
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