The biggest difference between financial accounting and management, or managerial, accounting is that financial accounting is aimed at producing financial information for people outside the company, while managerial accounting is about informing people within the company so they can make management decisions. As a result, financial accounting is highly regulated, while managerial accounting can be done in a company's own style depending on what it finds useful.
Financial accounting is the branch of accounting that produces the corporate numbers often cited in the business press when companies announce their earnings. It's regulated in the United States by the Financial Accounting Standards Board, which produces standards known as generally accepted accounting principles. Companies generally need to adhere to these rules when they produce their public financial statements.
Financial accounting generally produces statements in a very specific format at very specific times, often required by law. The statements can be dry and often don't contain more information than they need to comply with the law and inform investors about what's going on in the company. In addition, they usually focus on the company as a whole as opposed to particular units and divisions.
These statements are also often reviewed by outside auditors to ensure they are accurate and comply with the law. While internal reports don't need to be audited unless the company elects to, it is still good practice to do so. Internal audits can catch issues early as well as ensuring accuracy of processes and procedures to keep the company running smoothly.
Since managerial accounting entails producing documents and numbers to use internally, it can be more informal in many ways than financial accounting. It can use nonstandard measures and estimates if they're helpful, as opposed to generally accepted accounting principle numbers, and it can produce reports on particular aspects of the company at whatever time frame is useful in making business decisions.
Managerial accounting reports can focus on what's working, what's not and why so that the company can grow and improve, rather than just looking at the bottom line. Its reports can discuss how money is currently allocated within the company and speculate on ways it can perform better.
Accountants can often be more candid in reports intended for internal use as opposed to financial accounting statements that will be publicly released or at least shared with investors and regulators. Still, some information may be phrased in a certain way depending on who's going to be reviewing it, since the content of managerial accounting documents can have effects on employees who see them, including shaping morale and employee behavior.
- Business Dictionary: Financial Accounting Definition
- Business Dictionary: Management Accounting Definition
- Financial Accounting Standards Board
- Institute of Management Accountants
- Accounting Tools: The Difference Between Financial and Managerial Accounting
- Accounting Coach: What is the Difference Between financial Accounting and Management Accounting?
- Financial Accounting vs. Managerial Accounting
- Financial Accounting Standards Board. "About the FASB." Accessed Sept. 26, 2020.
Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.