Financial accounting is about accurate tracking and external reporting. Management accounting is about internal knowledge-building and decision-making.
This guide looks into the differences and similarities between financial and management accounting. It also talks about the main features that make each approach different.
What is management accounting?
Management accounting (sometimes called managerial accounting) involves measuring, analysing and communicating financial activity and information to internal stakeholders. This method uses historical data to interpret past performance and predict future outcomes. This will help your business to make better decisions.
What is financial accounting?
Financial accounting involves recording and reporting all your business’ financial activity over a certain period. You record this information in several core financial statements, including cash flow statements, income statements, balance sheets and statements of retained earnings.
It gives external stakeholders a good understanding of your business’s financial position and profitability. Financial accounting has strict rules and standards. Some of these rules are set by tax laws and others by accounting standards boards.
Key roles and functions of financial accounting
The key roles and functions of financial accounting in a business include analysing financial data, budgeting, tax compliance, preparation, payroll processing and auditing, managing accounts payable and accounts receivable and tracking profit margins and cash flow.
Your accountant is responsible for managing these accounting basics — often with the help of other teams and accounting software.
While financial accounts could be used for internal business purposes, the main focus is external reporting, whether to tax authorities, auditors, potential lenders or investors.
Key roles and functions of management accounting
The key roles and functions of management accounting include collecting and analysing financial data and using that information to create reports and financial forecasts. This information helps with risk management, budgeting, strategic planning and goal setting.
Unlike financial accounting, management accounting is about improving decision-making with internal analytics, not external reporting.
Similarities between management and financial accounting
Management and financial accounting have several key similarities. Both practices involve recording, analysing and reporting on the same financial information. Both analyse cash flow, business expenses, assets and liabilities. Another critical similarity is their reporting — management and financial accounting condense financial insights into digestible reports and statements.
What are the differences between management and financial accounting?
Differences between management and financial accounting include the regulations they operate under, their timing and focus, the level of accuracy they require and the systems and processes that guide them.
Financial accounting - key points:
Reports used externally
Focus on historic performance
Must comply with strict regulations
Details must be accurate
Recording and reporting must meet accounting standards
Statements generated at the end of regular accounting periods
Managed using an accounting software system
Management accounting - key points:
Reports used internally
Focus on future possibilities
Meet internal requirements
Can include estimates and assumptions
Customisable and flexible based on managerial needs
Reports, forecasts and statements are generated as often as required
Managed with different types of software and systems.
Regulation
Regulation is an essential difference between financial and management accounting. Financial accounting is governed by stringent regulatory standards, and your financial statements need to meet those requirements.
Tip: Use financial software such as MYOB Business or MYOB AccountRight to track your income and expenses and simplify your accounting processes.
For larger or more complex businesses, there’s MYOB Acumatica a cloud enterprise resource planning system. MYOB Acumatica allows financial accounting and reporting across multiple entities.
Past, present and future
Another critical distinction is whether financial information relates to the past, present or future. Financial accounting accurately records and reports historical data from a defined period. Management accounting spans the past, present and future through analytics, reporting and forecasting.
Detail and aggregation
The level of detail and aggregation methods used are also different. Financial accounting needs comprehensive, accurate data to meet reporting requirements. In management accounting, analysis often uses a subset of economic data, while reports can include estimates or complex numbers.
Systems
The systems and processes used to manage financial data vary between accounting types. Financial accounting in publicly traded companies usually follows AASB (Australian Accounting Standards Board) standards, which outline how to prepare financial reports for tax or investment purposes.
In management accounting, there are fewer strict rules around formatting and calculations. Managerial accountants use various techniques to analyse your business data and draw valuable conclusions. These techniques include financial ratios, variance analysis, cost-volume-profit assessments, sales forecasting and demand forecasting.
Timing and frequency
The timing and frequency of financial reporting is another critical difference. Financial accountants track transactions throughout the financial year but produce reports at the end of the accounting period.
On the other hand, management accountants create reports and run analytics as and when your business needs them. For example, you might run a sales revenue report every week or generate a demand forecast once a quarter. It depends on the needs of your business.
Management accounting vs financial accounting FAQs
Will my business need both a financial and managerial accountant?
Your business doesn’t necessarily need both a financial and managerial accountant. An external financial accountant can manage financial statements and tax preparation for smaller companies and sole traders, while a business advisor can help with forecasting and budgets.
Accounting software can help you track and analyse your financial data throughout the year, better understand your situation and reduce the need for a full-time accountant.
Is management accounting more complicated than financial accounting?
Management accounting is often considered less complicated than financial accounting because the same legal rules and regulations don’t govern it. However, the difficulty depends on your business, financial situation and needs.
What are the limitations of management accounting?
Management accounting limitations include dependence on historical data and a need for more standardisation around reporting and analysis. It may also have limited value if it doesn’t include external information sources, like market analysis or sales trends.
Your multi-purpose accounting tool
Accounting software is vital to your financial toolkit, whether you’re preparing tax documents or assessing last month’s sales. MYOB’s accounting software makes it easy to track business transactions, generate financial statements and analyse data to spot future trends.
MYOB Business and MYOB AccountRight are ideal for sole traders, small and medium-sized businesses who are looking to simplify and automate their reporting. MYOB Acumatica is a cloud enterprise resource planning system designed for larger and more complex businesses.
Want to simplify accounting in your business? Explore the plans or contact us to set up a demo of MYOB Acumatica.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.