## **Learning Outcomes**

After reading this article, you will be able to distinguish between financial and management accounting within a business context. You will understand the structure and duties of an organisation’s accounting function, including how financial accounting and management accounting serve different purposes, users, and reporting requirements. You will also recognise the key reports produced by each and how these contribute to business control and decision-making.

## **ACCA Business and Technology (BT) Syllabus**

For ACCA Business and Technology (BT), you are required to understand the main roles of the accounting function, including the differences between financial and management accounting and the structure of accounting within business, as well as its links to business decisions and control. This article focuses on:

- The contribution of the accounting function to policy, procedures and performance
- Main financial accounting functions in business: recording, processing, and preparation of financial statements
- Main management accounting functions in business: planning, cost analysis, budgeting and control
- Key reports produced by each function and their purposes
- Differences between financial and management accounting: users, reporting frequency/formats, and information types

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Who are the primary users of financial accounting reports? Who are the main users of management accounting information?
2. State two key differences between financial and management accounting.
3. True or false? Management accounting reports must always comply with international accounting standards.
4. Which type of accounting is more concerned with future planning—financial or management accounting? Briefly justify your answer.

## **Introduction**

The accounting function forms the backbone of a business’s information system. It is responsible for recording, processing and reporting financial data, and providing managers with information for decision-making, planning, and control. Within this function, financial accounting and management accounting play distinct yet mutually supportive roles.

Businesses typically establish an accounting department which may be organised into separate teams or individuals focused on financial accounting, management accounting, and related treasury functions. Understanding how these functions operate and interact is essential for efficient business management and meeting statutory obligations.

> **Key Term: accounting function**
> The department or team within an organisation responsible for recording, processing, and reporting financial transactions and providing information to support decision-making.

## Structure and Role of the Accounting Function

The accounting function can be structured into three core areas:

1. Financial accounting
2. Management accounting
3. Treasury and finance (including tax, cash, and funding management)

Each area has dedicated responsibilities and outputs, but close communication between them is necessary for effective business operations.

### Financial Accounting

Financial accounting captures and summarises all business transactions in accordance with established rules and standards. Its main purpose is the accurate preparation and presentation of annual financial statements for external users.

> **Key Term: financial accounting**
> The branch of accounting concerned with recording, summarising, and reporting an organisation’s financial transactions for external stakeholders in accordance with statutory and professional standards.

#### Key Responsibilities (Financial Accounting)

- Recording financial transactions
- Maintaining accounting records (manual or electronic)
- Codifying and processing financial information
- Preparing financial statements: statement of profit or loss, statement of financial position, and statement of cash flows
- Ensuring compliance with relevant laws, regulations and standards

#### Main Users of Financial Accounting Information

- Shareholders/owners
- Potential investors
- Lenders and banks
- Government authorities (tax, regulators)
- Suppliers and other external parties

#### Reporting Features (Financial Accounting)

- Reports are historical, summarising performance over a past period (usually annually or quarterly)
- Must comply with legal requirements and recognised accounting standards (e.g., International Financial Reporting Standards)

### Management Accounting

Management accounting focuses on supplying managers with relevant information to plan, control, and make decisions that improve organisational performance.

> **Key Term: management accounting**
> The provision of financial and non-financial information to internal management for planning, control, and decision-making, tailored to the organisation's needs and not governed by statutory standards.

#### Key Responsibilities (Management Accounting)

- Recording and analysing costs and revenues
- Preparing management reports (budgets, forecasts, variance analyses)
- Assisting in decision-making (e.g., pricing, make-or-buy decisions)
- Short-term and long-term planning
- Budgeting and budgetary control

#### Main Users of Management Accounting Information

- Internal management at all levels (directors, managers, supervisors)
- Departmental heads and operations staff

#### Reporting Features (Management Accounting)

- Reports can be tailored to internal requirements—there is no mandatory format
- Information may include financial and non-financial data
- Emphasis on forward-looking analyses and projections, as well as historic performance
- Prepared as needed—daily, weekly, monthly, or for specific projects

### Comparison: Financial vs Management Accounting

| **Aspect**       | **Financial Accounting**                 | **Management Accounting**                    |
| ---------------- | ---------------------------------------- | -------------------------------------------- |
| Primary users    | External stakeholders                    | Internal management                          |
| Main purpose     | Statutory reporting, performance summary | Planning, control, decision support          |
| Reporting period | Past performance (historical)            | Past and future (includes forecasts/budgets) |
| Regulation       | Must follow standards/laws               | No mandatory standards—internal requirements |
| Information type | Mainly financial                         | Financial and non-financial                  |
| Reporting format | Standardised (statutory)                 | Flexible, as needed by managers              |

### **Worked Example 1.1**

**A retail business needs to decide whether to open an additional store. Which accounting function will provide the most useful information for the decision, and what type of report will be produced?**

> **Answer:** The management accounting function will play the key role. It will provide a forecasted profit statement, cash flow projection, and break-even analysis for the proposed store—helping management judge viability.

### **Worked Example 1.2**

**A company accountant is preparing year-end accounts and is unsure about how to value closing inventory. Which area of accounting is this, and what rules should be followed?**

> **Answer:** This task is part of financial accounting. The accountant should apply relevant financial reporting standards, such as those governing inventory valuation under International Financial Reporting Standards.

## Outputs of the Accounting Function

### Financial Accounting Key Outputs

- Statement of profit or loss (income statement): Shows income and expenses, resulting profit or loss
- Statement of financial position: Lists assets, liabilities, and equity at period end
- Statement of cash flows: Explains sources and uses of cash during the period
- Statutory annual reports for external filing

#### Management Accounting Key Outputs

- Budgets and forecasts for sales, production, costs
- Cost schedules and standard cost cards
- Variance analysis reports (actual vs budget)
- Decision-support reports (e.g., product profitability analysis)
- Performance dashboards and KPIs

## How the Accounting Function Supports Policy and Control

A central purpose of the accounting function is to provide reliable information for planning, policy-setting, implementation, control, and performance evaluation.

- Financial accounting ensures statutory compliance, accuracy, and stewardship of resources
- Management accounting supports effective use of resources, goal setting, and corrective action

> **Key Term: budgeting**
> The process of preparing and agreeing financial plans (budgets) that set out income and expenditure targets for future periods.
>
> **Key Term: variance analysis**
> The process of comparing actual results to budgets and analysing reasons for differences to support management control.

### **Exam Warning**

> When answering exam questions, do not confuse financial accounting's statutory focus with management accounting's decision-making role. Always identify the user and purpose of the report before choosing your answer.

### Common Structure of the Accounting Function

In larger organisations, the accounting function is often structured as follows:

- **Financial accounting team:** Maintains ledgers, prepares accounts, liaises with external auditors
- **Management accounting team:** Prepares budgets, forecasts, monthly performance reports, costings
- **Treasury/finance team:** Manages cash, funding, investments, tax, and risk

All teams should communicate closely and share information as needed to ensure reliable reporting and effective business decisions.

## **Summary**

Financial accounting and management accounting are two core specialisms within an organisation's accounting function. Financial accounting focuses on accurate, standardised external reporting. Management accounting provides timely, relevant information for internal planning and control. Both collaborate to support business objectives, with different users, outputs, and reporting requirements.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- The structure of the accounting function: financial accounting vs management accounting
- Distinct purposes and users of financial and management accounting
- Key outputs of financial accounting (financial statements) and management accounting (budgets, costings, variance reports)
- Reporting requirements: statutory vs non-statutory formats and frequency
- How the accounting function supports planning, control, and decision-making

## **Key Terms and Concepts**

- accounting function
- financial accounting
- management accounting
- budgeting
- variance analysis

Role and structure of the accounting function - Financial vs management accounting