Thursday, February 3, 2011

Difference between Financial Accounting and Management Accounting

Primarily financial accounting and management accounting are two branches of accountancy and differ quite widely from each other. However in many of the organizations the professionals of financial accounting and management accounting perform tasks overriding each other. Nevertheless it is important to know the distinction between the two to dole out relevant undertakings in order to maximize the efficiency by exploiting the idiosyncratic capabilities of the professionals of both the steams. The major areas of distinction between the two are as follows:
Legal requirement
Financial accounting is largely required in most countries under the law and firms are bound to prepare financial accounts as per local taxation and other reporting regulations. On the other hand management accounting is entirely optional in nature and does not extend any compulsion to the firms to implement the management accounting system. It is not regulated by any law rather it is on the stake of management either to adopt management accounting for internal efficiency or not take on it.  
Focus on individual segments of the firm
The focal point of financial accounting is the whole organization. Financial accountants are responsible to prepare accounts for whole of the organization and management is required to get them audited to ensure true and fair view of the operating performance and financial management of the company. Financial accounts are not prepared for individual segments of the firm. Management accounting can be used to analyze the costs, benefits, and profitability of the individual segments and plans of the business. However management accounts can also be prepared for whole of the organization for industry comparisons and analyzing annual performances.
Generally Accepted Accounting Principals (GAAP)
While preparing financial accounts the companies are required to abide by the standards, principals, and assumptions stated in the Generally Accepted Accounting Principals (GAAP). Financial reporting is sought to be in accordance with International Accounting Standards and International Financial Reporting Standards governed by the International Accounting Standards Board to ensure uniformity through out the world for the clear comprehension of the external users. Than again management accounting is not covered under the GAAP and does not necessitate uniform reporting mechanism through the world.  
Time dimensions and reporting frequency
Financial accounting basically covers a time dimension usually six months or twelve months and reports income statement and cash flow for a specific time duration and balance sheet at a specific date. Conversely management accounting has no such time dimension and management reports are generated on daily, weekly, and monthly basis in accordance with the requirements of the management.
Future orientation
Financial accounting is essentially past oriented in nature whereas management accounting is meant for what went before as well as it is prospective in nature. Financial accounting only states what happened last year whereas management accounting may also state what is going to happen next year.


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