by Leigh Goessl

Created on: October 12, 2008   Last Updated: July 22, 2011

When considering accounting practices, at first glance one might think there is little, if any, difference between financial accounting and management accounting. In reality there are significant differences between the two.

While many of the logistics of each form of accounting are the same, each style functions in a different kind of way and serves a differing purpose.

Managerial accounting serves in the capacity of providing information to managers and internal members of an organization. Financial accounting's function is to provide information to outside stakeholders, such as creditors and stockholders, who are interested in and have a financial investment or stake in a company.

While both kinds of accounting often use the same financial data to calculate figures, it is the objectives for using them which vastly differ. Accounting is comprised of several processes: recording, estimating, organizing and summarizing the financial and operations data in order to make decisions.

When you break it down a little more, this is where the more distinguished differences arise between financial and managerial accounting:

• Financial accounting

Financial accounting reports to external users such as lenders, owners (stockholders), tax authorities, and regulators. These reports are designed to be publicly viewed and accountants have specific regulatory formats which must be followed. These financial reports are required to disclose specific financial activity for interested parties to view.

It is vital that financial statements generated for purposes of financial accounting fall in accordance with Generally Accepted Accounting Principles (GAAP) and the designated stipulations are followed to provide accuracy. This is mandatory for the generation of external reports which are created with the intention on being released to the public which includes summary data encompassing the entire organization.

A significant component of financial accounting is it should emphasize the financial costs of prior activity with a degree of objectivity and verifiability. Precision is another important factor of financial accounting. These are figures which will be relied upon for all interested parties and they should reflect integrity, and accuracy.

• Managerial accounting

Managerial accounting is a different approach to accounting. This accounting method is a managerial tool which can be effective in making internal decisions to help determine growth and assist with decision

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