by Minor Magical

Created on: September 04, 2010   Last Updated: September 05, 2010

Management accounting and financial accounting are the two main branches of Accounting.  There are three key distinguishing elements of these two branches namely; the methodology of preparation, the intended end user(s) of the information generated and the legal issues governing their conduct.

1.  THE METHODOLOGY

This refers to how the information is gathered, recorded, and reported. Under this, Management accounting differs from financial accounting in the following ways:

(a)  Financial accounting focuses on historical information.

The chronology of events over a given period is important because financial accounting yields a report on how financial events transpired in the past financial year (or period under review).

Management accounting on the other hand is more like a management tool for strategic planning.  It is not concerned with reporting but collecting data to be used by the management; in planning, organizing, staffing, directing and for control purposes.

(b) Financial accounting revolves around double-entry. Here, the accounting

Equation is the guiding principle.  In other words, it entails entering data in the accounting books as either debit or credit and journalizing the entries.

Management accounting does not rely on any specific format of gathering information.

(c)  Management accounting is futuristic in nature.  It is all about creating budgets and forecasting events.  The actual events normally turn out to deviate from the forecasts but it is an important practice as it prepares the management team for what to expect. How the information is presented does not matter.

Financial accounting, as mentioned earlier on, is historical, it is simply, a report.  The presentation is done in financial statements (also known as annual reports).

2. THE INTENDED USERS

(a)  Financial accounting generates information to be used by external users.  They include the shareholders of the firm, creditors, competitors, suppliers, the government (through it’s tax agencies) and would be investors

Management accounting is specifically prepared for internal use only.  The top level managers need the information to run the firm.  The information that is generated is ‘raw’ and it would be invaluable to internal users.

3.  LEGAL ISSUES

(a)  Financial accounting is guided by the Generally Accepted Accounting Principles (G.A.A.P) and the information is prepared in accordance with

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