Distinguish between financial accounting and management accounting

The term “financial accounting – management accounting ” is often used in accounting. However, if you are not an employee in the Accounting industry, it is not easy to understand and distinguish the two terms above. The following article helps you get an overview and compare the terms “financial accounting – management accounting .”

I. How is financial accounting similar and different from management accounting?

Objectives are the fundamental difference between financial accounting and management accounting. If the objective of financial accounting is to provide information to an external audience, including shareholders, current and potential investors, creditors, government agencies, investment analysts, etc., securities, customers, and management accountants provide information to serve the managers of that organization. They can be executives, marketing directors, chief financial officers, etc.

Management accountants create products that are management reports, financial plans, and strategies to help business managers’ decision-making for the business. Financial accounting reflects the current status and fluctuations in capital and assets of the company in a general form or, in other words, reflects the physical and cash flows in the relationship between enterprises with the external economic environment. The product of financial accounting is financial statements. Financial accounting information is used for business management, external parties such as investors, banks, tax authorities, financial agencies, etc., and statistical offices.

1. The difference

1) Purposes:

• Management accounting has the following purposes: Providing information to manage production and business activities. Financial accounting provides information for the preparation of financial statements.

2) Objects of service:

• The users of management accounting information are: Company managers (Board of Directors, Board of Directors).
• The users of financial accounting information are: Company managers and objects outside the business (Investors, banks, tax authorities, financial agencies, statistical agencies).

3) Information characteristics:

• Management accounting emphasizes the relevance and flexibility of data. Information is aggregated and analyzed from many different angles. Information pays less attention to accuracy but instead reflects volatile and predictive trends, so management accounting information serves to evaluate and build business plans track in the form of value and form of a kind. For example, Accounting supplies and tracking the value of supplies must also keep track of the number of supplies.
• Financial accounting reflects information that happened in the past, which requires objectivity and verifiability. Information is tracked only in the form of value.

4) Principles of providing information:

• Management accounting is not mandatory; managers can decide and adjust according to the business’s needs and management capabilities.
• Financial accounting must respect the generally recognized and used accounting principles. In other words, financial accounting must ensure consistency according to specific accounting principles and standards so that everyone has the same understanding of accounting information. Especially financial statements and financial accounting must comply with the provisions of current laws, especially those of financial management and the requirements of society, through the publication of mandatory data.

5) Scope of information:

• The scope of management accounting information related to the management of each department (workshop, department) to each relevant individual.
• The scope of financial accounting information relates to managing finances on an enterprise-wide scale..

6) Reporting period:

• Management accountants have more reporting periods: Quarter, year, month, week, and day. – Financial accounting has a reporting period: Quarter, year.

7) Relationship with other sciences:

• Because management accounting information is provided to serve the management function and rely on it. In the initial recording system of financial accounting, management accounting must also combine and use the content of many other scientific subjects such as economics, economic statistics, business organization, management, and investment management to synthesize, analyze and process information.
• Financial accounting has little relationship with other sciences.

8) Statutory Mandatory:

• Management accounting is not compulsory.
• Financial accounting is required by law, meaning that the books and statements of financial accountants in all businesses must be consistent. The report will not be accepted if incorrect or if the accounting system is not recorded correctly.

2. The similar

However, financial and management accounting systems have many similarities because both methods rely on data gathered from the organization’s underlying accounting system. This system includes procedures, personnel, and computer systems to collect and store the organization’s financial data. This general accounting system is the cost accounting system, which gathers cost information used in management and financial accounting. For example, management uses product cost data to determine a product’s selling price and the informational use of management accounting. However, cost data are also used to determine the value of inventories on the balance sheet, which is another purpose of using financial accounting information.
The method of planning in many businesses is also different. Planning processes can be divided into two ways:

• First: planning based on growth. Businesses often rely on the company’s development and past data (growth rate of revenue, rate of increase in costs) and estimate the implementation plan for the future. This method is often used quite popularly today due to its ease of implementation and relatively accurate estimation. Companies operating in the production block usually apply this method.
• Second: based on the business’s goals. Businesses often rely on their growth goals in the coming time and set out action plans to achieve that goal. This planning method is usually applied to companies operating in the service sector.

In addition, very few enterprises pay attention to planning the combination of the two methods above due to the complexity of quantifying planning data and the inadequate information infrastructure.

The cost management and control system is also formed according to the company’s administrative needs and the planning (estimated) system. However, cost control only stops at a few relatively large and high proportioned expense items such as advertising and marketing expenses, transportation costs, salaries, etc. (in selling expenses); fees for reception, training, etc. (in business management expenses). In addition, cost management at the production stage (for enterprises with production activities) is closely organized to reduce product costs.

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