Differences between financial accounting and management accounting




Financial and management accounting are important tools for a business, but they serve different purposes. A company uses accounting to determine operating plans in the future, to review past performance and to check current business functions. Management accounting and financial accounting have different audiences, as investors do not typically participate in day-to-day operations of the company, but are concerned about their investment, while managers need information quickly to make daily business decisions.


Financial Accounting
Financial accounting is used to present the financial situation of an organization to its external stakeholders. The board of directors, shareholders, financial institutions and other investors are hearing the financial accounting reports. Financial accounting presents a specific period of time in the past and allows the public to see how the company has evolved. Financial accounting reports should be filed on an annual basis and for publicly traded companies, the annual report should be part of the public record.

Management accounting
Management accounting is used by managers to make decisions regarding the day-to-day operations of a business. It is based not on past results, but on current and future trends, which does not allow accurate numbers. Because managers often have to make operational decisions in a short period of time in a fluctuating environment, management accounting is mainly based on forecasting markets and trends.

The differences
Management accounting is presented internally, while financial accounting is used for external stakeholders. Although financial management is of great importance to current and potential investors, management accounting is necessary for managers to make current and future financial decisions. Financial accounting is accurate and must adhere to Generally Accepted Accounting Principles (GAAP), but management accounting is often more like a guess or an estimate, since most managers do not have Time to analyze the exact numbers when a decision has to be made.

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