Difference Between Financial Accounting And Management Accounting With Example ?

Difference Between Financial Accounting And Management Accounting

Financial accounting and management accounting are two distinct branches of accounting that serve different purposes within an organization. 

Here's a breakdown of their differences along with examples:

1. Purpose:

    Financial accounting: It focuses on reporting the financial performance and position of a company to external parties such as investors, creditors, regulators, and tax authorities. The primary objective is to provide accurate and reliable financial information for decision-making outside the organization.

    Management accounting: It concentrates on providing financial information to internal stakeholders like managers, executives, and employees to aid in decision-making, planning, control, and performance evaluation within the organization.

2. Users:

    Financial accounting: External stakeholders such as investors, creditors, regulatory authorities, and government agencies use financial accounting information for making investment decisions, assessing creditworthiness, and regulatory compliance.

    Management accounting: Internal stakeholders like managers, executives, department heads, and employees utilize management accounting information for strategic planning, budgeting, forecasting, performance evaluation, and decision-making.

3. Focus:

    Financial accounting: It primarily deals with historical financial data and focuses on providing a summary of a company's financial performance over a specific period through financial statements like income statements, balance sheets, and cash flow statements.

   Management accounting: It emphasizes both historical and future-oriented financial information. Management accountants analyze past performance and use this information to make forecasts, budgets, and plans to guide future decision-making.

4. Regulation:

    Financial accounting: It is subject to strict regulatory standards and principles such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), which ensure consistency, comparability, and transparency in financial reporting.

    Management accounting: There are no specific regulatory standards governing management accounting practices. Organizations have the flexibility to design management accounting systems tailored to their specific needs and objectives.

Example:

Let's consider a manufacturing company that produces and sells furniture.

 Financial accounting: The company's financial accounting department prepares financial statements such as income statements, balance sheets, and cash flow statements at the end of each accounting period (e.g., quarterly or annually). These statements provide information about the company's revenue, expenses, assets, liabilities, and equity to external stakeholders like investors, creditors, and tax authorities.

  

 Management accounting: The company's management accounting team may analyze the cost structure of the furniture production process, conduct variance analysis to compare actual costs with budgeted costs, and prepare budgets for future production and sales targets. They may also develop pricing strategies for different furniture products based on cost analysis, market demand, and competitive factors to maximize profitability and performance within the organization.