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Most people think, wrongly, that accountants all do the same sort of thing. The title accountant covers a range of different roles, and while they all based around finance, there are a range of specialisms. Just because someone is a police officer does not mean they do exactly the same thing as other police officers - some are in uniform and on the street, some deal with traffic or crime investigation, and some are more administrative. It's the same, in a way, with accountants. The difference between financial accounting and management accounts is a good example of thisseparation into specialisms.

Financial accounting is all about meeting the reporting rules laid down by various organisations such as the Financial Accounting Standards Board (FASB) or the Securities and Exchange Commission (SEC). These organisations define the standards against which corporations must prepare their annual or quarterly annual statements.

It is a basic principle that once a year an incorporated body, such as a company, must publish accounts for its financial year. Shareholders, banks, potential investors and others interested in that company's performance will review the accounts in detail, and will compare its performance to that of similar companies. It's only possible to make a good comparison if both organisations prepare their accounts in the same way.

For example, the term 'turnover' need to have the same meaning in both companies. If for one company 'turnover' meant the total of all the sales made in the year, and for the other company the term 'turnover' meant the total of all the sales plus other income received from, say, the sale of some disused factories, then 'turnover' would not mean the same thing. This makes comparison difficult, if not impossible.

Accounting standards have developed to ensure that, as far as possible, the published financial accounts of companies are consistent, and as close to reality as possible.

Management accounts are completely different. These are usually produced within an organisation for use by the management of that organisation. Their purpose is not to tell shareholders or banks what is going on, but to inform management in order for them to make operational decisions. They need to know how much profit a particular division is making each month, or whether a new product is generating the sales that they expected.

The format of management accounts differs hugely from one company to another, and there are no externally defined standards. Within an industry, such as the motor trade, there may be common practices in the preparation of management accounts, but these are due to the common nature of the operations and not because external bodies are looking for consistency.

Management accounts are prepared more frequently, and are more flexible in nature, than financial accounts. This is why, in large corporations, there are different teams of accountants for each area: one focused on financial accounts and one on management accounts. The needs of each function are quite different, because their purpose is different.

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