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What Are the Differences Between Management Accounting and Financial Accounting?

By Sophia, published on 01/10/2018 Blog > Academia > Accounting > Differences Between Management Accounting and Financial Accounting

If you are studying accounting principles, perhaps as an undergraduate or retraining for a new career in an accounting program, you are probably already well aware what terms such as cost accounting, statement analysis and valuation mean.

And of course, everyone knows what income taxes and payroll deductions are!

What is perhaps less clear is that accounting is so much more than adding and subtracting; credits and debits.

There is a whole school of thought on accounting, called accounting theory, that shapes the daily efforts of every type of accountant, from the CPA working independently to the chartered accountant in an office.

As you may have guessed, there is more than one type of accountant and, even though they may all employ the same accounting systems, each realm has its trademark and distinct focus.

Besides the certified public accountants and chartered accountants just mentioned:

  • forensic accountants analyse financial data to investigate fraud or other white collar crime

  • tax accountants specialise in preparing taxes and forestalling audits

  • auditors conduct that activity that sends shivers down the spines of the ones audited.

  • Financial advisors and consultants are those brought in for a single project, be it a business overhaul or eliminating financial waste.

However, most companies already have such an accountant on hand. In fact, due to the sensitive nature of corporate finance, most companies keep accountants on the payroll.

Financial accountants and management accounting vary from the more familiar types of accounting in that they are dedicated to a single company’s financial health and growth.

Although they may function in tandem, they each have a distinct role to play in the corporate financial structure.

Your Superprof takes you beyond tax time, to the daily grind and surprisingly controlled chaos that sometimes besets a business’ accounting department.

Specifically, we highlight the differences between financial and managerial accounting.

Are you studying for your CPA exam with an eye to becoming such an accountant?

If so, the following information might help you decide how much accounting education you still need.

Who They Report To

As an accountant, you may report to a superior or to tax agents. An accountant may report to several entities, external or internal to the company Source: Pixabay Credit: Fotographielink

Who either of these accountant types reports to, and how, is only one of the fundamental differences between them.

Financial accountants report external to the company: to shareholders and creditors, investors and to the tax authorities.

You may also be familiar with reports from a company that details the business’ profitability and periodic growth – quarterly, semiannually or annual reports. They are prepared by financial accountants.

By contrast, managerial accountants report only to managers and, perhaps, company employees.

Although those accountants also engage in financial reporting, any information they bring is meant strictly for use inside the company.

Do employees, say, on a production line, need to know about the company’s balance sheet?

Probably only inasmuch as their production quotas fluctuate as a result of those reports, and maybe the payroll department won’t get an order to raise salaries if the company is doing poorly.

Managers, on the other hand, need to know just about everything that’s going on, money-wise, so that they may brief executives about budget concerns or constraints.

Whereas most people think the executives hand down a budget that everyone down the ranks must live by, it is, in fact, the management accountants who propose budget limits for every phase of a company’s operation.

The executives approve and disseminate the budget limits.

You can see now why it is so important for every company to have its own accounting department, can’t you?

Would you take center stage or stay behind the scenes? While a management accountant takes center stage in risk assessment, a financial accountant stays behind the scenes. Source: Pixabay Credit: Geralt

The Roles They Play

While nobody will probably ever call the accounting profession glamorous, there is a certain cachet to accountancy, especially if you are a management accountant.

Should you, Accounting Major, aspire to be such an accountant, you will become (one of) the company’s planners and risk managers.

Risk? In accounting? Of course!

Should a company expand to a second location? Widen its distribution field? Manufacture and market a new line of products? Go international?

All of that is predicated upon the analysis of the senior management accountant.

If s/he says the company has enough in the asset column to make such a jump, executives will most likely go ahead with the planning… and the one with the accounting skills will be smack in the thick of things, budgeting every last detail!

On the other hand, if things go out of hand; maybe the move proves too costly, it would be the managerial accountant’s job to bring that accounting information to those in power.

That job description makes bookkeeping sound rather sexy, doesn’t it?

Do financial accountants have similar glitter in their accounting basics?

They too function as an internal control, but in a different way than cost accountants (another name for managerial accountants).

They are not so much concerned with the company budget as it applies to day to day operations; their focus is more on the trial balance: do the credits total more than the debits on any given day?

If the inverse is consistently true, the senior accountant would most likely have a conversation with the executive branch of the company…

And, that being the case, you may say that financial accountants are risk-averse.

There are distinct rules that govern accountant reporting You have to know the rules of accounting in order to be successful! Source: Pixabay Credit: Geralt

The Rules They Follow

Here, there is much more similarity between the financial and managerial accountant.

For one, both types of accountants use accounting information systems, albeit for different purposes.

Another way that they compare is that they both follow the generally accepted accounting principles (practice, in our country) or GAAP (UK GAAP, for us).

At this point, they diverge a bit.

Whereas the financial accountant might report under the International Financial Reporting Standards if the company s/he’s employed with is a global enterprise, as yet the managerial accountant is not compelled to that standard.

However, more and more companies, whether international or not, are moving toward those accounting practices simply to streamline accounting concepts.

If you are taking accounting courses, you might want to direct a bit of your focus on IFRS, if only to broaden your knowledge base and make you a more competitive hire.

Another fundamental difference between the two types of accountants is the accounting procedures used.

As already explained, managerial accountants use the accounting process to plan strategic moves the company could make or optimise financial performance.

Laying off workers is a result of such accounting work, for example.

Financial accountants are more concerned with the accounting cycle; the recording of complete accounting events.

Please note we did say that these accountants are more invested in the trial balance than in the overall financial report; in fact, the general ledger is their playground.

They practice what is called accrual accounting, a method of accounting that calls for recording transactions perhaps even before money changes hands.

Let’s say a government contractor orders a million each of part number XYZ. Of course, they are not going to pay for their order all at once; such a large invoice would be payable in instalments.

Nevertheless, the financial accountant would treat the order as though it had been paid in full even though no payment has yet been made.

In today’s global markets, it is imperative that this accounting method is practised; otherwise, any company’s financial statement would reflect poorly indeed!

In fact, the GAAP requires large companies to use the accrual method in preparing their financial statements.

Although any company may choose to employ managerial accountants, every company is required by law to have financial accountants on staff.

The role of financial accountants, while seemingly mundane, touches every aspect of a company:

  • internal auditing and the possibility of an external audit

  • recording revenue and calculating profit

  • recording debits and credits

  • tracking assets liabilities

  • maintaining records for the purpose of taxation

While it is true that they are not actively engaged in the decision-making process like managerial accountants are, they are the ones that set internal controls for those cost accountants to work with.

So, as you near completion of your degree in accounting, maybe you could overlook that seemingly high-profile forensic accounting career and consider financial statement analysis and advanced accounting for a company, instead.

Working as a professional accountant in such a business environment may not bring the thrill that being an auditor might bring, but there is a measure of safety – as opposed to going into business for yourself.

Here, you only need basic accounting skills to see the difference!

As an accountant for a large firm, perhaps doing international accounting, you would have set work hours and benefits.

However, plying the principles of accounting as an independent public accountant means you set your hours to your clients’ needs, possibly working until late at night.

You have all of your office overhead to consider, and must track expenses yourself!

So, if you’ve not yet finished your accounting course and are wondering which direction to take your knowledge and skills, the answer is clear: financial accounting will give you the greatest opportunity to apply accounting standards.

But managerial accounting will give you a broader spectrum to apply them in!

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