Financial and managerial accounting are two practices used to generate business reports. Financial and managerial methods are two of the four biggest branches of the accounting discipline.
It might seem that these two methods are very similar. However, financial and managerial accounting are two different principles despite multiple similarities. These differences are based on the audiences who get reports and accounting standards. Keep reading the article to learn more about the topic.
What is Financial Accounting
Financial accounting is used to record, analyze and summarize a business’s transactions and economic activity. Then the accountant generates the report based on gathered and analyzed data so it can be used for external purposes. In that case, external purposes are to show the reports based on business activities to investors and regulators.
What is Managerial Accounting
Managerial (or sometimes management) accounting is a method used for internal purposes. It requires identifying, gathering, analyzing, and interpreting given data. The accountant makes a report based on the interpretation of data so the managers of a company can use it in decision-making.
Knowing two definitions, one may assume that the main difference between these two accounting practices is the audience that receives reports. Management accounting is used to assist the company in the pursuit of its main objectives. In comparison, financial accounting is used to report to existing or potential investors, regulators, etc.
Goals of Both Practices
The main goal of managerial accounting is to generate useful reports for a business’s internal usage. The company’s management needs information to create strategic plans. The data produced by this method aids managers in setting realistic objectives and effectively applying the company’s resources.
Financial accounting is more focused on external goals, although it has some internal use as well. However, the main objective is to focus on the data outside of the company.
The main idea of financial accounting is to create a financial statement that reflects a company’s performance and financial health. The financial method is aimed at creditors, investors, industry regulators, whereas the managerial method is aimed at internal managers.
One of the biggest differences between these two practices is in legal status. Management reports aim at only the internal audience of the company. It means that companies may create reports based on their ideas and protocols. On the other hand, finding the required data may be more difficult because of the lack of centralized systems.
Financial accounting is regulated. This method involves creating income statements, balance sheets, and cash flow statements, and laws highly regulate these practices.
Data generated by financial accounting is released in public and anticipated by investors. That’s why companies must be very careful to avoid any mistakes when doing calculations and presenting these figures.
Overall, financial accounting is accepted and regulated by GAAP (Generally Accepted Accounting Principles). Investors and regulators can analyze different companies because businesses form all reports according to strict rules. Moreover, according to this method, businesses must follow a schedule when releasing financial statements and other external information.
Because of peculiarities of the financial accounting methods, generated reports are sometimes aggregated and too general. The data reflected in such reports is both transparent and less revealing. That’s not the case with managerial accounting.
Management accounting reports are very detailed, technical, and specific. Companies are often trying to analyze the company’s data to come up with competitive advantages. Using these advantages may help businesses use their strengths to pursue specific goals.
Difference Between Financial and Managerial Accounting
There are several major differences between managerial and financial accounting methods. Future accountants should pay attention to these differences when studying at a university to pursue a career in accounting.
- Reporting focus. Financial accounting is focused on producing financial statements. These reports are shared with external and internal stakeholders. In contrast, reports produced thanks to managerial practices are only shared within the company.
- Frequency. As mentioned, financial accounting is regulated by GAAP. Accountants that certify must meet deadlines.
- Typically, accountants must prepare financial statements by the end of an accounting period. In contrast, managerial reports depend on the internal regulations of the company. Typically, managers require frequent reporting for decision-making.
- Standards. Accountants generating financial reports must follow strict rules described in GAAP. Managerial reports depend only on the internal standards of the company.
- Period. In financial accounting, accountants generate reports based on existing data during a given period, for example, an accounting year. In managerial practices, accountants must use tools to forecast.
These differences should be considered not just by current professionals but also by aspiring future accountants. Future accountants must go through various educational programs since both financial and managerial accounting are considered advanced practices.
Students can choose a program focused on one or two of these practices, so in the future, they may apply their knowledge. Note experts in financial and managerial accounting are in demand.
So, how do you choose between these two accounting practices? If your business needs financing from investors or creditors, you should definitely consider generally accepted reporting. In this case, consider financial accounting.
But overall, most businesses need managerial accounting to make decisions for the future of the company. Managerial reports give business owners and managers an insight into the internal situation. Based on reports, they can see if the company is properly distributing resources to get the best out of business operations.
Author: Charles Lutwidge