Most people think accounting is accounting. Whatever the title, that person keeps track of the dollars, cents, ledgers, etc. While this view is understandable it isn’t altogether correct. Perhaps the best way to illustrate this is to delve into the somewhat common question of the difference between financial accounting and management accounting.
Financial accounting is primarily for outside parties. This is because its job is to determine the fiscal health of a company for Boards of Directors, shareholders, institutional investors, and the like. They are concerned with providing detailed financial reports of whatever relevant time period in the past to see how a company has performed. These are important documents that must be filed on a scheduled basis whether it be annually, quarterly, etc. They are also used by potential investors to decide if they would like to get involved with a particular company.
Management accounting is an internal function for leadership. It’s used to make day-to-day decisions and chart course for the future. In contrast with financial accounting’s focus on the past, management accounting is concerned with the present and what’s ahead. These situations preclude the specificity of data that financial accounting has. Also, management accounting isn’t subject to any legal requirements or reporting schedule as with financial accounting.
Many times management accounting will include cost accounting. Cost accounting is concerned with formulating the cost of products, projects, etc. It also provides analyses of things like variance, cost behavior, and budgeting. Management needs this information to help them make decisions concerning a company’s future.
As you can see, the field of accounting is more varied than one might think. Both financial and management accounting are crucial to a company’s financial well-being but operate in almost opposite ways.