Differentiate between Management Accounting and Financial Accounting

Financial accountancy (or financial accounting) is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, government agencies, owners, and other stakeholders. The fundamental need for financial accounting is to reduce principal-agent problem by measuring and monitoring agents' performance and reporting the results to interested users.

Financial accountancy is used to prepare accounting information for people outside the organization or not involved in the day to day running of the company. Managerial accounting provides accounting information to help managers make decisions to manage the business.

Financial accountancy is governed by both local and international accounting standards.

Management accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis in making informed business decisions that would allow them to be better equipped in their management and control functions. Unlike financial accountancy information (which, for public companies, is public information), management accounting information is used within an organization (typically for decision-making) and is usually confidential and its access available only to a select few.

According to the Chartered Institute of Management Accountants (CIMA), Management Accounting is "the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non management groups such as shareholders, creditors, regulatory agencies and tax authorities" (CIMA Official Terminology).

The distinctions between financial accounting and management accounting may be summarized as follows:

1. In most of the big business houses, financial accounting is the responsibility within the management accounting. It is the duty of financial accounting to process the mass of unwieldy data and make free the management accountant from the details. The management accounting, in its turn, sorts out the significant figures and channels them for the use in management process. Management accounting offers figures as facts having managerial significance.

2. Financial accounting is more confined to the preparation of accounts from the point of view of outside parties (Eg. Debenture-holders, creditors and shareholders) while management accounting used the information for internal use of management.

3. Financial accounting tries to present statements according to standards laid down by the outside parties while management accounting tries to measure up to the standards laid down by the management which may be much higher than that laid by the outsiders.

4. Financial accounting is made compulsory by law but management accounting is adopted to increase the efficiency without and legal force.

5. Financial accounting lays emphasis on the past while management accounting stresses the future.

6. Financial accounting deals with the whole of the business while management accounting takes up only those divisions of the business which are vital and significant in business activities.