Difference between Financial Accounting and Management Accounting

Financial Accounting and Management Accounting are two distinct fields of accounting, both of which serve different purposes in a business. While both types of accounting involve the use of financial data, their applications, and intended audiences are different.

What is Financial Accounting?

An accounting system that helps in classifying, analysing, summarising, and recording a company’s financial transactions is known as Financial Accounting. It is concerned with preparing financial statements for external stakeholders, including investors, creditors, and regulators. Financial accounting provides a historical record of a company’s financial performance and position, which can be used to assess its financial health and make investment decisions.

The financial statements prepared in financial accounting are standardised and must follow Generally Accepted Accounting Principles (GAAP). Financial statements are prepared as per Schedule III of the Companies Act, 2013. The main financial statements are the income statement, balance sheet, and cash flow statement, which report a company’s revenue and expenses, assets and liabilities, and cash flows, respectively.

Financial accounting is highly regulated and subject to strict rules and guidelines to ensure accuracy and transparency. The information reported in financial statements must be audited by an independent auditor to verify its accuracy.

What is Management Accounting?

An accounting system that helps in collecting, analysing, and understanding the financial, qualitative, and statistical information ultimately helping the management in making effective decisions regarding the business is known as Management Accounting. It is also known as Managerial Accounting. In simple terms, it is concerned with providing information to the management of a company to assist them in making decisions. 

Management accounting uses financial data to generate reports that are tailored to the needs of specific managers and departments within an organisation. These reports can include budget forecasts, cost analysis, variance analysis, etc.

Unlike financial accounting, management accounting is not subject to strict regulations or standardised reporting requirements. Management accountants have greater flexibility in how they report financial data, allowing them to create reports that are more relevant and useful to specific managers and departments.

Difference between Financial Accounting and Management Accounting

Basis	Financial Accounting	Management Accounting
Meaning	An accounting system that helps in classifying, analysing, summarising, and recording a company’s financial transactions.	An accounting system that helps in collecting, analysing, and understanding the financial, qualitative, and statistical information ultimately helps the management in making effective decisions regarding the business.
Application	It helps in showing a true and fair picture of the financial position of an organisation.	It helps the management in making meaningful decisions and strategizes accordingly.
Objective	Its objective is to create periodical reports.	Its objective is to assist the internal management of an organisation in making decisions.
Users	There are both internal (employees, management, etc.) and external (customers, creditors, etc.) users of financial accounting.	There are only internal users (management, etc.) of management accounting.
Nature of the Statements prepared	The statements under financial accounting are prepared for general-purpose.	The statements or reports under management accounting are prepared for specific-purpose.
Statutory Requirement	It is mandatory to prepare the financial statements of a company.	There is no statutory requirement for management accounting.
Scope	The scope of financial accounting is pervasive.	The scope of management accounting is broader than financial accounting.
Rules	Financial accounting strictly follows the rules of GAAP.	There are no fixed rules while preparing reports through management accounting.
Time Span	Financial statements under this accounting system are prepared for a fixed time period; i.e., one year.	Reports under this accounting system are prepared according to their need.
Basis of Decision-making	Historical information is used as the basis of decision-making.	Historical and estimated (predictive) information is used as the basis of decision-making.
Verifiable	The information presented in the financial statements is verifiable.	The information presented in the reports is predictive; hence, not immediately verifiable.
Format	There is a specific format for presenting and recording information through financial accounting.	There is no specific format for presenting information in management accounting.