Management Accounting

Financial Accounting:

* Communicates economic information to individuals and organizations that are external to the direct operations of the company

* Stresses the form in which it is communicated

* Is based on historical information

It is about the balance sheet, the income statement, the financial statement of the company (the notes). The stakeholders (shareholders, clients, suppliers, the government, employees, etc.) are interested by the financial statements. Financial accounting is mainly developed for external users.

What can we find in a balance sheet? What does it tell us? The past financial performance of the company.

The income statement gives us an overview of the expenses and revenues of the companies, their use, and more generally, what is the wealth of the organization.

Another aspect, when we prepare a balance sheet, an income statement, there are legal constraints, rules, general principles that have to be followed. Everything is strictly regulated, there are very strict rules. I.e.: the Generally Accepted Accounting Principles (GAAP): Belgian GAAP, etc.

Management Accounting:

Assumption: a CEO must decide whether or not he'll produce a new product. Where will he find the required information (the price of the product, etc. and more generally, all the necessary information)? Are the financial statements helpful in this case? No, they don't.

Other example: are we going to outsource part of our production in another country? This decision must also be based on information, which will neither be present in a financial statement.

In management accounting, we try to create information for intern purposes, like managers. Is that product profitable or not, what is going to be the price charged for this new product, how do people perform in my company, etc.?

The application field is thus different with respect to the two fields of accounting. In management accounting, every decision is different and creates a specific information need, so that the rules are not so strict in financial accounting, the regulation degree is lower.

Management accounting:

* Provides information to managers and employees within the organization (internal use). It's oriented to meeting the decision-making needs of a company. If well managed, a management accounting system can become a source of competitive advantage.

* Allows great discretion to design systems that provide information for helping employees and managers make decisions

* Forward looking: another difference is linked to the term: management accounting information is forward looking: the decision to be made will happen in the (near) future.