There is a big difference between financial and management accounting when it comes to business. These two categories of accounting are simple to understand. They each have their own purpose.
Knowing the difference will help you optimize both types of accounting to it’s fullest. Remember, business is all about making money and knowing how to read the financial numbers makes a huge difference in how you operate it.
Financial accounting is primarily for people outside of the company. Shareholders in a company don’t know what goes on day in and day out in the company. They are not on the front lines. The only way they can know that this is a good stock to invest in is by reading a financial statement that has the pertinent information in it.
It also gives information to regulators like the SEC if the business is a publicly traded company. Financial accounting is also used by creditors like banks and bond holders to evaluate the health of a company. This is also used for reporting business taxes to the IRS.
Management accounting is primarily for internal purposes to be able to make good decisions. Managers use it to evaluate their department or divisions. Most of management accounting the public will never see.
If you get access to management accounting figures, it will most likely be in the form of divisions and departments. These could be very useful for investing purposes if you have access to it.
Sometimes, they include these reports in the annual reports. The SEC doesn’t require it, but investors like to know a little more than what is required minimum by the government.
For example, GE has 4 or 5 major divisions in their company. They will break down the revenues and profits that came from each of those divisions. You can even see analyses broken out by these divisions.
They will also have figures that financial accounting doesn’t report. For example, Apple likes to release how many units of their iPhones sold in any given quarter. This does not necessarily have a dollar amount attached to it. This would be considered management accounting.
Management accounting is still very important for investors if you know how to read them properly.
About the Author
David Chung is the Financial Editor at Finance World Online. You can find more of his commentary and analysis at financeworldonline.net. There’ s a ton of great business, finance and investing resources there.