A company needs financial accounting to effectively manage its financial activities and financial standing with regard to external stakeholders. It helps the company to keep track of its financial transactions. It is a necessary document required at the end of the financial year to ascertain the financial worthiness of a company. It is also required if a company involves in merger and acquisitions or even make any crucial decisions. The obtained financial information is used to make business-related transactions.
However, financial management requires decision-making.
Hence, the major distinction between financial accounting and management is that financial accounting is in charge of recording business transactions, whereas financial management collects business data and enables the company to make better decisions that help in achieving the goals of the company.
What is Financial Accounting?
It is the traditional form of accounting. It deals with the functions of record keeping, compiling information, preparing financial statements and so on. Calculating the financial worthiness of a company, its debt ratio, solvency and even goodwill is also part of financial accounting. This enables the company to give pertinent information to stakeholders.
What is Financial Management?
Financial management is responsible for allocating the company's financial resources and making a financial decision to maximise the business's success and increasing the return on investment (ROI). Financial management professionals arrange resources and plan and manage them according to the organisation's financial needs.
Management professionals concentrate on finding and investing funds in the best possible areas. Managerial accounting is a part of management and is crucial to enhance the function of financial management of the company.
Difference Between Financial Accounting and Financial Management
The major distinctions between financial accounting and financial management can be enumerated as follows:
The process of classification, documentation and analysis of a company's financial records and financial transactions is known as financial accounting.
Financial management is the process of analysing business information to help make better business decisions for fulfilling the financial goals of the company.
Financial accounting is strictly applied in recording business transactions to the actual and fair status of the financial affairs of the company.
Management is applied in the management space to stay up-to-date with business information and take relevant decisions.
The scope of financial accounting is a bit limited in nature. It is mainly concerned with recording business transactions and preparing financial statements.
Financial management is however wider in scope. It analyses the financial statements of the company and carries out the process of financial planning and making business strategies.
Financial accounting restricts itself only to the quantitative aspects of the company.
However, management deals with both the quantitative and qualitative aspects of the organisation. It analyses the numbers and also the strategies incorporated for daily operations.
Financial accounting can be carried out independently and it does not depend upon financial planning or management in any way.
Financial management is dependent upon the financial statements that have been prepared by financial accountants. It allows management professionals to formulate new policies, accordingly.
Basis of Decision Making
Decisions in financial accounting are made on the basis of historical financial information. It records the information on the transactions that have already taken place.
On the contrary, both current and futuristic financial information is the basis of decision-making in financial management. It analyses the already recorded financial statements and makes strategies for the future.
Financial accounting is a statutory requirement as the law requires the preparation of financial accounts of the organisations.
On the other hand, financial management is completely at the discretion of the organisation. The law does not expressly require this function to be performed by the companies.
Financial accounting mainly concerns the investors and stakeholders of an organisation. It helps them to see a clear picture of the financial status of the company, whereas financial management only concerns the administration. It formulas financial plans, strategies and business decisions.
Adherence to Rules
Financial accounting should adhere to the rules of GAAP or IFRS.
In the case of financial management, there is no specific rule regarding the presentation of information.
Financial accounting is applied to the entire company as every department needs to record business information for the preparation of financial statements.
On the other hand, financial management is applied to the department of financial planning and business administration.
The data and records in financial accounting are verifiable.
In the case of financial management, the data is predictive and is not verified immediately. The outcome, whether successful or not, can reflect on financial accounting books in the future.
Financial accounting and financial management are distinct in character but both aspects are important to sustain in the competitive business era. One must be educated in the fundamentals of accounting as well as the pertinent laws and standards in order to master these ideas. To understand them better, an IIM investment banking course is a great choice. An advanced course can help you scale great heights in the business world.