The Accountant in Business

Financial Accounting and Management Accounting

The two main branches of accounting serve different purposes and different audiences.

Financial Accounting

Financial accounting focuses on the preparation of financial statements based on historical information for external stakeholders.

• Statements include: income statement, statement of financial position, annual report
• Prepared for: shareholders, government, banks, potential investors, creditors
• Compulsory for limited companies — required by the Companies Acts and must comply with International Accounting Standards (IASs)
• Must follow specified formats under IAS
• Covers a defined accounting period (usually one year)
• Presents only monetary information

Management Accounting

Management accounting provides both quantitative and qualitative information to managers to assist with planning, control and decision-making.

• Not compulsory — businesses develop systems to meet their own internal needs
• No specified format — produced as and when required by management
• Forward-looking: based on current and future trends, not just past performance
• Used exclusively by internal management
• Includes both monetary and non-monetary information

Comparison Table

Examples

Financial accounting outputs:

• Income statement
• Statement of financial position
• Annual report

Management accounting activities:

• Planning: preparation of budgets
• Control: standard costing and variance analysis
• Decision-making (short-term): marginal costing
• Decision-making (long-term): capital investment appraisal