Financial accounting and managerial accounting are two of the four most extensive branches of the accounting discipline (e.g. tax accounting and auditing are others). Despite many similarities in approach and usage, there are significant differences between financial and managerial accounting. These differences primarily centre around compliance, accounting standards, and target audiences.
What is managerial accounting?
Managerial accounting (also known as cost accounting or management accounting) is a branch of accounting that is concerned with the identification, measurement, analysis, and interpretation of accounting information so that managers can use it to make informed operational decisions.
Unlike financial accounting, which is primarily concentrated on coordinating and reporting the company’s financial transactions to outsiders (e.g., investors, lenders), managerial accounting is focused on internal reporting to aid decision-making.
Managerial accountants need to analyse various events and operational metrics in order to translate data into useful information that the company’s management can leverage in their decision-making process. They aim to provide detailed information regarding its operations by analysing each line of products, operating activity, facility, etc.
What is Financial Accounting?
Financial accounting is a specific branch of accounting involving recording, summarising, and reporting the myriad of transactions resulting from business operations over a while. These transactions are summarised in the preparation of financial statements, including the balance sheet, income statement and cash flow statement, that record the company’s operating performance over a specified period.
Difference between financial and managerial accounting:
There are several differences between financial and managerial accounting, which are noted below.
Financial accounting reports on the results of an entire business. Managerial accounting almost always reports at a more detailed level, such as profits by product, product line, customer, and geographic region. Financial accounting reports are more likely to be distributed to outsiders, while the results of managerial accounting are more likely only to be used by insiders.
Financial accounting reports on the profitability (and therefore the efficiency) of a business, whereas managerial accounting reports specifically what is causing problems and how to fix them. Managerial accounting reports are more likely to be of use in improving operations, while financial accounting reports are used by outsiders to decide whether to invest in or lend to a business.
Financial accounting requires that records be kept with considerable precision, which is needed to prove that the financial statements are correct. Outside auditors rely on this information when auditing a firm’s financial statements. Conversely, managerial accounting frequently deals with estimates rather than proven and verifiable facts.
Financial accounting is oriented toward the creation of financial statements, which are distributed both within and outside of a company. Managerial accounting is more concerned with operational reports, which are only distributed within a company.
Financial accounting must comply with various accounting standards, whereas managerial accounting does not have to comply with any standards when information is compiled for internal consumption.
Financial accounting pays no attention to the overall system that a company has for generating a profit, only its outcome. Conversely, managerial accounting is interested in the location of bottleneck operations, and the various ways to enhance profits by resolving bottleneck issues.
Financial accounting is concerned with the financial results that a business has already achieved, so it has a historical orientation. Managerial accounting may address budgets and forecasts, and so can have a future orientation.
Financial accounting requires that financial statements be issued following the end of an accounting period. Managerial accounting may issue reports much more frequently since the information it provides is of most relevance if managers can see it right away.
Financial accounting addresses the proper valuation of assets and liabilities, and so is involved with impairments, revaluations, and so forth. Managerial accounting is not concerned with the value of these items, only their productivity.
There is also a difference in the accounting certifications typically found in each of these areas. People with the Certified Public Accountant designation have been trained in financial accounting, while those with the Certified Management Accountant designation have been trained in managerial accounting.
Pay levels tend to be higher in the area of financial accounting and somewhat lower for managerial accounting, perhaps because there is a perception that more training is required to be fully conversant in financial accounting.
Does Managerial Accounting Follow GAAP?
Financial accounting reports are distributed inside and outside of a business and are governed by GAAP and IFRS. The external publication of financial statements makes it very necessary to follow regulations to provide correct information.
Managerial accounting reports are shared internally only and are, therefore, not subject to such rules and regulations and are not required by laws to follow any accounting standard.