Financial and management accounting look at a business using different perspectives. Management accounting, also known as cost accounting, focuses in the internal needs of a company, while financial accounting concentrates on outside users of information. Financial statements compilation is associated with financial accounting. Budgets and cost variances relate to management accounting
Focus of Attention
Management accountants are concerned with planning and controlling operations, focusing on details, such as material costs. The more complex an operation is, the more likely it is to have more accountants dedicated to management needs, such as budgeting, and strategic planning.
Financial reports represent a business as a whole, while managerial accounting is often more goal-oriented and more specific to an area of a business. For example, a manager may ask accounting to give him a report showing sales numbers for the past two years. He is interested in only a part of the big picture.
Past versus Future
Financial accounting is concerned with the past, while management accounting deals with the future. Financial accountants want to make sure that historical data is compiled properly. They don’t care if expenses are above budget or about cost variances because they usually don’t provide budget information to outsiders. Instead, they focus on compiling data properly, following GAAP- Generally Accepted Accounting Principles.
Another area where financial and management accounting differ is that management accountants need to be nimble enough to provide internal reports on as-needed-basis as well as periodic statements. It’s common for accountants to run queries or setup reports without much lead-time. The point is to get the information to management fast. This is not the case with financial accounting, where accountants want to be precise and careful because reports go to users outside the business, such as investors or creditors. Financial reporting usually takes time and it is a planned event.
Generally in computerized accounting, the cost accounting system interfaces with the financial accounting system, feeding into specific accounts, such as inventories and cost of good sold. The company uses the cost system in its daily activities to control its processes and be able to assign costs to each part manufactured. Financial accounting doesn’t need to know costs of manufactured part A versus part B — these are particular concerns of management accounting only. Often, once a week or a month the controller runs an interface where information is transferred to certain accounts in the general ledger.
Usually if something looks odd or wrong in the financial system, the management program is used as back up and for research. For instance, if the transportation-in account looks too large, then the accountant could use the management module or system to get information on inventory and other purchases that could cause the unexpected variance.
Many times the same individual does management and financial accounting without realizing it. This is often the case with small businesses. In many instances boundaries between the two types of accounting are blurred and is not a problem. However, when dealing with larger businesses, it is helpful keep tasks and processes between the two types of accounting separated, but connected.