Two of the four branches of accounting are financial accounting and managerial accounting (for example, tax accounting and auditing are others). Despite many similarities in approach and use, there are significant differences between financial and managerial accounting. These differences are primarily related to compliance, accounting standards, and the target audience.
Key Points
Management accounting is the practice of identifying, measuring, analyzing, interpreting, and communicating financial information to managers to pursue an organization’s objectives.
Financial accounting is the process of recording, evaluating, and conveying the transaction process and economic growth resulting from business procedures through time to the community and regulators.
Management accounting differs from financial accounting because the intended purpose of management accounting is to assist users in making well-informed business judgments.
Main Objectives of Both Counting Practices
The primary goal of managerial accounting is to generate relevant information for one company’s internal usage. Business managers gather the information that encourages strategic planning, helps them set realistic goals, and encourages efficient management of corporate resources.
Financial accounting also has internal uses, but it’s more concerned with informing a company’s outsiders: final accounts, creditors, and industry officials.
Past and Present Use
Financial accounting produces purely historical data, with financial statements containing data for a specific period. Management accounting examines past performance and creates business predictions. You should use this accounting to guide business decisions. Investors and creditors frequently use financial statements to make their projections. Financial accounting is not retrospective in this sense. However, no future predictions are allowed in the reports.
Adjustment and Uniformity
The most significant practical distinction between financial and managerial accounting is their legal standing. The reports generated through management accounting are disseminated only internally. Each company is free to develop its system and rules on management relationships. It means no centralized system adjusts the reports, and it can often take a lot longer to find what you need.
Conversely, financial accounting relationships are highly regulated, especially income statements, balance sheets, and cash flow statements. As this information is released for public consumption and is highly anticipated by investors, companies need to pay close attention to how they do the calculations, how the data is reported, and the order in which such reports are written.
The Financial Accounting Standards Board (FASB), under the auspices of the Securities and Exchange Commission (SEC), creates financial accounting rules in the United States. The sum of these rules is defined as Generally Accepted Accounting Principles (GAAP).
This uniformity makes investors and lenders compare companies directly based on their balance sheets. Furthermore, the financial statements are released regularly, establishing the consistency of external information flows.
Report Details
Financial accounting reports are typically aggregated, concise, and generic for various reasons. Information is both more transparent and less revealing at the same time. It isn’t always the case in management accounting, as each organization has its own set of reasons for doing things a certain way. For example, you may internally report lower bonuses to avoid upset low- to mid-level employees who might want to investigate the report.
Management accounting reports are highly detailed, technical, specific, and often experimental. Businesses seek a competitive advantage and scrutinize information that might seem pedantic or confusing to outsiders.
Bottom Line
The key difference between managerial and financial accounting relates to the recipients of the information. Management accounting information is meant to help managers make well-informed business decisions, while financial accounting is intended to provide financial information to parties other than the organization.
Financial accounting must adhere to specific criteria GAAP sets to maintain its public trading status. Most other corporations in the United States use GAAP to meet the debt covenants generally needed by financial institutions granting lines of credit. Because managerial accounting is not meant for external users, it can be customized to meet their needs. It varies significantly from firm to company and even from department to department within a corporation.
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