Difference Between Accounting and Financial Management
The key difference between Accounting vs financial management is that Accounting is the process of recording, maintaining as well as reporting the financial affairs of the company which shows the clear financial position of the company, whereas, the financial management is the management of the finances and investment of different individuals, organizations and other entities.
They are the two separate functions where accounting requires reporting past financial transactions, whereas the other requires planning about future transactions.
What is Accounting?
Accounting is measuring, processing, and recording of financial transactions of an organization. The process is to summarize, analyze, and record such information to be reported to management, creditors, shareholders, investors, and the oversight officials or tax officials.
The primary objective is reporting the financial information or transactions using Generally Accepted Accounting Principles (GAAP).
Accounting can be divided into several fields like Financial AccountingFinancial AccountingFinancial accounting refers to bookkeeping, i.e., identifying, classifying, summarizing and recording all the financial transactions in the Income Statement, Balance Sheet and Cash Flow Statement. It even includes the analysis of these financial statements., management accounting, tax accountingTax AccountingTax accounting is the framework that considers the tax returns instead of public financial statements disclosure while recording and presenting the business transactions in the books of accounts. It complies with the rules and policies of the company's Internal Revenue Code., and cost accounting. The two main types are:
- Financial Accounting: Reporting financial informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc. to external users like creditors, suppliers, government agencies, analysts, etc. is financial accounting
- Management accounting: Reporting financial informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc. to internal users like management and employees is called management accounting.
Financial statements use standard procedures and accounting principlesAccounting PrinciplesAccounting principles are the set guidelines and rules issued by accounting standards like GAAP and IFRS for the companies to follow while recording and presenting the financial information in the books of accounts. laid by organizations such as the Financial Accounting Standards Board (FASB) in the United States and the Financial Reporting Council in the United Kingdom.
What is Financial Management?
Financial Management helps to manage the finances and economic resources of the organization. It is about managing the economic activities of the organization efficiently to achieve financial objectives. Financial management aids management in better decision making.
A key objective of Financial management is to create wealth for the business and investors, generate cash, earn good returns at adequate risk by using the organizational resources efficiently.
Key elements of financial management are Financial planningFinancial PlanningFinancial planning is a structured approach to understanding your current and future financial goals and then taking the necessary measures to accomplish them. Because this does not begin and end in a specific time frame, it is referred to as an ongoing process., control, and decision-making.
- Financial planning involves funding; the management of the firm needs to ensure that adequate funds are available at the time of need to run the business. Proper financial planning ensures the short, medium, and long-term requirements of funds can be fulfilled.
- Financial control is the most critical element of management as it ensures efficient utilization of the firm’s assets.
- Financial decision-making deals with investment, financing options, and dividends part of the business so that the firm generates a good return on investments and distribute its wealth amongst the shareholders through dividend payoutsDividend PayoutsThe dividend payout ratio is the ratio between the total amount of dividends paid (preferred and normal dividend) to the company's net income. Formula = Dividends/Net Income.
Accounting vs. Financial Management Infographics
- Accounting is more about reporting whereas financial management involves assets and resources of the company and their effective utilization
- The key objective of accounting is providing financial information using standard procedures and rules, whereas the objective of formal management is to create wealth, generate cash and earn good returns by effective use of the company’s assets.
- Accounting reports the financial information to creditors, investors, analysts, management, and regulators, whereas financial management is used by the management of the company.
- Accounting has two main typesAccounting Has Two Main TypesThere are different types of the accounting which an organization can follow as per the scope of its work and need of stakeholders. Some of them include financial accounting, forensic accounting, accounting information system, managerial accounting, taxation, auditing, cost accounting, etc. – financial and management accounting whereas financial management is a process with three main elements, i.e., financial planning, financial control, and financial decision making
- Accounting involves reporting past financial transactions, whereas the other management involves planning about future financial transactions.
- Accounting gives the financial position of the company, whereas financial management provides a holistic view of the business activities and provides insight into the future generation of wealth.
- Accounting follows Generally Accepted Accounting PrinciplesGenerally Accepted Accounting PrinciplesGenerally accepted accounting principles (GAAP) are the minimum standards and uniform guidelines for the accounting and reporting. These standards prohibit firms from engaging in unethical business activities and enable for a more accurate comparison of financial reports to investors. (GAAP) provided by the Financial Accounting Standards Board (FASB) in the US and Financial Reporting Council (FRC) in the UK.
|The basis for Comparison||Accounting||Financial Management|
|Basic Definition||Art of recording and reporting past financial transactions||Manages assets and liabilities of the firm to plan for future growth|
|Why is it important?||It gives the financial position of the business.||It helps to decide on future projects and manage the assets.|
|Who are the end-users?||Management, shareholders, regulators, analysts, creditors||Majorly management of the Company and the shareholdersThe Company And The ShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares.|
|Key objectives||Reporting financial informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc.||
|Types and key elements||It has two major types:
||There are no such types, but the process involves three key elements:
Accounting and financial management are both critical in their own capacity for the company. While both are part of finance, but they have their own differences, which sets them apart from each other. While accounting revolves around reporting financial transactions, whereas financial management is about managing the Company’s resources for managing future growth.
This has been a guide to Accounting vs. Financial Management. Here we discuss the Accounting and Financial management differences with infographics & comparative table. You may also have a look at the following articles for gaining further knowledge –