The Strauss Blog

Understanding Accounting to Better Manage Your Association

As an accountant working with associations, one question I’ve been asked is, “What is the difference between management accounting and financial accounting?” These are two distinctly different areas of accounting, and if you didn’t study accounting, this is probably something you were not aware of. Up until 2016, these two areas had different educational and work experience requirements for certification[1].

Any well managed association requires at least a basic knowledge of both areas of accounting, as evidenced by the fact that the Canadian Society for Association Executives includes this as a learning objective in the Financial Accounting module of the Certified Association Executive designation course.

Management Accounting

Management accounting focuses on the needs of individuals within the association – mainly the association’s operations and how various financial metrics can aid in improving operations. It is concerned with processes, costs behaviours and financial decision-making. Management accounting can help with questions such as whether to eliminate or continue with a program or service, or whether to do work in-house or look for an outside contractor.

In management accounting, costs are normally identified as either fixed (dictated by a contract or repetitive) or variable (changing all the time) to help in long term decision-making. For example, if a product or service such as an association’s monthly photocopier lease is eliminated, it is useful to know that certain expenses will not decrease. These expenses are known as the fixed costs. Management accounting may also focus on shorter time periods than financial accounting (as financial accounting is generally focused on set time periods such as monthly, quarterly or annual reporting), permitting leaders to act quickly in response to changing circumstances.

Financial Accounting

Financial accounting, on the other hand, is more concerned with an association’s financial health using more standard accounting practices. It is used to compile transactions into financial statements (i.e. income statement, balance sheet, etc.) and typical timeframes are monthly, quarterly or annually. Financial accounting is governed by accounting principles and usually subject to an external audit or review engagement by a professional accounting firm.

Key Differences

A few key differences between financial accounting and management accounting are:

  • Management accounting is focused on internal reporting and business processes while financial accounting refers to the compilation of accounting information and systems into typical financial statements.
  • Management accounting is generally used to make decisions regarding the future and therefore emphasizes forecasting future activity, whereas financial accounting deals with a history of previous periods and is based on facts and actual data.
  • Financial accounting is prepared to appease a much broader scope of readers than management accounting, which is usually only useful to an association’s leaders.
  • There are no regulatory standards for management accounting, but financial accounting must follow Generally Accepted Accounting Principles (GAAP), which are a common set of accepted accounting principles, standards, and procedures that companies and their accountants must follow when they compile their financial statements.
  • The amount of detail included in financial accounting reporting is intended to be concise and generalized, while management accounting reports are generally highly detailed. In addition, financial accounting reports are standardized, while there is no set format for presenting information in management accounting.
  • Financial accounting is not dependent on management accounting; however, management accounting can take some direction from financial accounting.

How Does this Help your Association?

Understanding these differences could help in making important decisions within an association. Are you hiring someone with the right kind of accounting experience to suit your association? Are you asking for the right kind of information to make informed decisions about the association? Are there standards that need to be met that affect the types of accounting reports you are requesting to see?

Even though there are many differences between the two, they are both necessary tools in running a successful association.

For more information of different types of accounting, visit my last blog article on Association Accounting vs. Business Accounting.

[1] Over the last six years, three accounting designations in Canada were merged to reduce confusion and provide clarity and simplicity in the accounting industry.