Accounting plays an important role in the life of organizations. There are several types of accounting such as financial, management and governmental accounting, taxation, audit. These types are usually focusing on different types of users that are interested in different types of information. In this essay I will examine the differences between financial accounting and management accounting. The basic difference between financial and management accounting is their target group. Management accounting provides information to the internal people of a given organization such as managers, controllers.
The main aim of financial accounting is to give information to the people who are outside of a given company, such as creditors, stockholders, suppliers. One of the key functions of the management is the planning. During this process the management has to plan the future sales, productions, and expenditures, which results from an investment. Usually the management has to make comparisons between investments and the best option has to be chosen. The calculations of the managers are based on the data of the past but their predictions are based on their information about the future.
Therefore in management accounting the past data and the future data or information are equally important. Financial accounting is focusing to the past, or in other words its focusing to the factual data. These are important for the outside users who are not really interested in predicted numbers and data because these are not factual information. These users are banks that use the financial information in the credit decision making process or the investors that wants to decide whether to buy a share of a given company or not, and sometimes the suppliers use these information to check their new customer’s credibility.
Another key function of the management is the controlling. During this process the managers can compare their previous expectations with the factual data. They can get a clear picture about how effective was their planning, or how profitable a given product or a given department. It can be seen that in this comparison the management is mainly focusing just on one product or on one department. Financial accounting presents the whole organization, because the outside users are not really interested in details. They usually focus on the performance, and the growth rate of a given company.
In other words the outside users are just interested in the outcomes of the decisions made by the management. The next difference between the two types of accounting is that management accounting is regulated, and standardized internally by a given company. There are no common laws and regulations about the management accounting. This results in different types of management accounting at different types of organizations. Financial accounting is strictly regulated by laws, standards and principles. It has got strict content and layout features.
These result in a more standardized outcome, consequently it is easier to compare two different types of companies. It can be seen that there are basic differences between the two types of accounting. In this essay I have shown that management accounting is a more detailed and unique type of accounting which is different in every organization, while financial accounting is a more standardized and more common type of accounting. It is generally accepted that both of them are very important for the companies to operate with the highest level of effectiveness in the future.