This article deals with a brief overview of some of the differences between financial accounting and management

accounting systems. But at first let us understand what accounting is.

What is accounting? Accounting may be defined as a system of collecting, summerising, analysing, and reporting in

financial terms, information about a business organisation. The business accounting as understood today, comprises

of, financial accounting, and management accounting. These two parts of the business system have something in

common and there are differences as well.

As a part of the accounting system of business enterprises, these two differ from each other in many respects.

The first difference is in its structure or formats of its presentation of information. Financial accounting has a single

unified structure of presentation, which means, that the information relating to enterprise business system is

presented more or less on a uniform basis. The end products of financial accounting are its three basic financial

statements, and these are:

- The balance sheet.

- The profit and loss account/income statement.

- The statement of changes in financial position.

The balance sheet presents the financial position of an organisation at any point of time. The profit and loss

statement would contain the organisation's financial performance over a specified period of time, which is usually one

year. The inflow and outflow of financial resources of an organisation during a period of time is reported in the

statement of changes.

The financial statements prepared are based upon an equation or model, which implies, that all organisations present

their financial statements on basis of a uniform structure. This would mean that financial accounting has a unified

structure.

Primarily, financial statements are usually meant for people outside the organisation, such as, shareholders,

creditors, government, the general public, and like others. These people also get such reports from other

organisations, and to maintain uniformity in these statements, financial accounting system uses a unified structure

system.

On the other hand, management accounting is mainly concerned with the in-house management. Since the

accounting statements are used internally, it varies in structure from organisation to organisation, depending upon the

circumstances and requirements of individual use. Therefore, management accounting is tailored to meet the needs

of the management of the particular organisation.

The next difference is in the generally accepted accounting principles. Financial accounting is prepared in

accordance with the Generally Accepted Accounting Principles, which in short is known as GAAP. Preparation of

financial statements following GAAP ensures that the account presentations have been prepared on basis of a norm,

as per the general guidelines issued by law.

On the other hand, management accounting is an in-house requirement, and is for the exclusive use of the

management of the organisation. These management accounting statements are never made available to the

outsiders, and hence could be formulated in the manner as wanted by the in-house management.

The third difference between financial accounting and management accounting is the statutory requirement of

preparation of accounts. As discussed above, financial statements are prepared solely for the people outside the

organisation, who have interests in the business operation of the organisation. There are shareholders, who would

use the information contained in the financial statements, to decide whether or not to invest in the organisation. By

law it is mandatory to prepare such statements, and it is a statutory obligation. In fact, the company law not only

makes it mandatory to prepare such accounts, it also has laid down the structures, based on which such financial

statements need to be prepared.

The fourth difference is the reflection of historical accounts. As mentioned above, there are three types of financial

accounting statements that are prepared. Within these three, while the balance sheet and the profit and loss account,

report the financial position on a particular date, and the results of operation of the organisation during a specific

period of time respectively, the statement of changes of the financial position reports the inflow and outflow of

resources during a particular period of time. Therefore, financial statements record historical data. On the other hand,

management accounting does not record any financial history of the organisation.

The fourth difference relates to segment reporting. Financial accounting pertains to the business as a whole, though

some organisations segment such accounting for its different operating centres. But, as and when the financial

statements are presented, it shows the business as a whole. Contrary to this, the management accounting system

may present statements in segmented fashion.

Finally, the financial accounting and management accounting differs in respect of their ultimate objectives. Financial

accounting is prepared specifically for external reporting, where-as, management accounts are solely for in-house

use.

In this brief presentation, it has become quite clear how financial accounting differs with management account

preparation. Both of the accounting systems are vital to any business scenario, and are mandatory requirements in a

corporate environment.
Over twenty two years experience in Oracle. Significant development & Management skills viz.,technical writing,

project planning and execution, project management, Oracle sql, pl/sql, data flow design, database design,

datawarehousing, Oracle applications viz., manufacturing, scm, crm, financials, hrms, workflow, Oracle discoverer

Article Source: http://EzineArticles.com/630546