Financial vs. Management Accounting: Key Differences & Objectives

Posted on Mar 9, 2025 in Business Administration and Innovation Management

Financial vs. Management Accounting

Companies prepare two main types of accounting information: financial accounting and management accounting.

Basic Types of Accounting Information

  • Financial Accounting (External): Prepared primarily for external users. Also known as General Accounting.

This information pertains to the company’s operations with other entities and is documented according to commercial and accounting laws (Commercial Code, Corporation Law, General Accounting Plan, etc.).

Financial accounting provides financial statements, including:

  • Balance Sheet
  • Income Statement
  • Statement of Changes in Equity
  • Cash Flow Statement
  • Memory (Notes to the Financial Statements)

This information is typically provided annually and must meet specific requirements and regulations.

How Companies Communicate Financial Information:

  • Legally: Depositing accounts in the Commercial Register (for SMEs, medium, and large companies). Users can request copies from the Registry.
  • Paper or Digital Format: Publishing accounts in book format or on CDs (for medium and large companies). Users can request accounts in these formats.
  • Internet: Publicly traded companies must include annual accounts on their websites, usually in PDF format. This is the most efficient way to communicate the information.
  • Management Accounting (Internal): Addressed to middle and upper management. Encompasses Management Accounting, Internal Accounting, Cost Accounting, and Managerial Accounting.

This information relates to the company’s production process, including:

  • Global or Department Budgets
  • Monitoring Reports
  • Cost Estimates of Goods or Services
  • Valuation

It is not governed by commercial laws but uses its own cost calculation methods (Direct Costing, Full Costing, Activity Based Costing (ABC)). It is prepared as frequently as managers require and must be relevant and timely.

Objectives of Financial Reporting

The objectives of financial reporting depend on the users and their needs. Key objectives include:

  • Accountability: To shareholders, owners, and the Public Administration for tax purposes (corporation tax, VAT), grants, and financial statistics.
  • Provide Useful Information for Economic Decisions: For financial institutions (lending), vendors (credit sales), investors (buying/selling stock), customers (ensuring product/service delivery), employees (wage negotiations), and the government (economic measures).