by Juan Leer

Created on: May 25, 2008   Last Updated: August 06, 2009

When people think about the profession of accounting and what accountants do on a day-to-day basis, they probably think all accountants do the same thing and have the same goals. This is not the case, as there are many different types of accounting that is practiced out in the workplace.

Accounting can be broken down many different ways, but one of the main ways involves looking at the differences between financial accounting and management accounting. Both have different purposes and uses, and as a result they have different rules and emphases.

The main purpose of management accounting is to help managers make decisions to fulfill an organization's goals. As a result, the primary users are managers of organizations, and the reports are specifically tailored to suit their needs. Because these reports are meant to help them make better decisions in the future, these reports tend to be future-oriented, such as budgets prepared for future periods or future years.

Such reports do not have to follow GAAP (Generally Accepted Accounting Principles), because they are mostly for internal use and internal measurement. The time span can vary greatly for these reports, ranging from having hourly information to having information for the next 15 to 20 years. These reports are all designed to influence the behavior and managers and their employees.

On the contrary the main purpose of financial accounting is to communicate an organization's financial position to investors, banks, regulators, and other outside parties that might be interested. As you might expect then, the primary users of financial accounting information are primarily external, such as investors, banks, regulators, and suppliers. The reports tend to be past-oriented, and attempt to properly show what did happen.

There are many rules associated with financial accounting, as the reports must be prepared in accordance with GAAP and be certified by external, independent auditors. There is usually a more uniform time variance for the reports, as they are usually done either annually or quarterly, and on the entire company as a whole. So financial accounting primarily reports the economic events, but it does also influence behavior within the company because oftentimes a manager's compensation might be based on reported financial accounting results.

So financial accounting and management accounting might sound similar, but they are very different, with different purposes and users. As a result, they are prepared very differently and used by different people. Understanding these differences is key for understanding accounting concepts.

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