An organization’s financial success hugely depends on its accountants. They handle financial data so that others can focus on other important procedures. Managerial accounting and financial accounting are two of the four largest branches of accounting.
If you dream to pursue a business career, you should know the difference between financial and managerial accounting. You should be able to differentiate the two accounting fields if you want to serve as an accountant.
Understanding the difference will help you pick the right role in your favorite field of accounting. This post will explain the major differences between managerial and financial accounting in a detailed way.
In order to understand the importance of financial and managerial accounting, you need to understand their definitions.
Financial accounting is the basic form of accounting. It involves efficient record-keeping. Professionals work tirelessly to prepare financial statements and report the financial data of the organization. The data is prepared based on accounting principles, assumptions, and conventions.
Skilled accountants follow Schedule III of the Companies Act, 2013 to prepare financial statements. This branch of accounting works to determine data related to the performance, position, and profitability of the organization. It is completely based on activities that occur in the organization and thus the financial data is collected. Organizations have also started determining earnings per share and cash flows to monitor the company’s growth.
Financial accounting is important because:
“Financial accounting’s main goal is to determine what will be the result of business operations. It ascertains the profits and losses of the business. Financial accounting is also important to deliver information related to the business organization’s standing in the present day.”
Managerial accounting or management accounting for business managers. It provides data for forecasting, making policies, controlling and planning the deviation. This branch of accounting collects and assesses both qualitative and quantitative information.
Managers use managerial accounting to prepare management reports based on simple and understandable formats. Those formats include charts, tables, graphs, etc. and they make presentations more efficient.
In simple terms, we can say that Managerial accounting is extremely essential to produce accurate management reports. Accountants use proven management accounting methods to prepare timely and accurate data managers to need to make well-informed decisions.
Accountants can prepare daily, weekly, monthly, or yearly reports depending on the needs of an organization. There is no specific timeline to report the information management seeks for flawless planning.
Managerial accounting uses data collected through a variety of accounting methods. That information is needed for:
Managerial accounting is not just concerned with financial and cost-related data. Management can use essential information obtained from various business activities. It helps the management in setting realistic goals, budgeting, and avoiding decision-making mistakes.
The management needs to function effectively to prevent potential losses. Management accounting plays an important role by providing historical and estimated data. The management team uses that information for proper assessment and improving performance. It also helps the management team develop perfect plans for future operations and avoid mistakes.
Major differences between financial and managerial accounting methods include the following:
Financial accounting is an extremely important discipline. It requires skilled accountants to prepare financial statements. They interpret the financial information for internal and external users. Accountants work tirelessly to prepare final accounts to reveal the company’s financial health and business performance. The data produced through financial accounting methods are intended for creditors, investors, and industry regulators.
Managerial accounting methods produce information for an organization’s internal usage. Managers seek that information to set achievable goals, make strategic plans, and use the organization’s resources smartly. Your company’s management will make perfect policies if it receives reliable data. External users have no use for the data obtained through managerial accounting.
Financial accounting methods produce data that is entirely historical. All financial statements include information gathered during a defined period. Managerial accounting does not concern with past data. It focuses on improving the future performance of the business and preparing business forecasts. Management accounting hugely influences the decision-making process.
Creditors, regulators, and investors can use financial statements to prepare separate forecasts. Thus, you can say that financial accounting is not just concerned with past information. Experts can use the data to predict the future financial health of the firm. However, financial statements do not forecast the future.
Financial accounting reports are often concise, aggregated, and generalized for various reasons. The information may seem pretty transparent but it will not be too revealing. Managerial accounting reports are pretty different.
Each company follow a particular way to carry out important procedures. It is often tough to prepare honest reports to avoid angering mid-level employees. Managerial accounting professionals prepare highly technical, detailed, and experimental reports. Companies seek a competitive advantage over major rivals. They use accounting reports to find the data they can use to beat competitors.
The legal status of financial and managerial accounting methods creates the biggest difference between these accounting disciplines. Managerial accounting reports are not meant to be shared with outside users. Companies can create management accounting reports and use them the way they find useful. Business organizations can set distinct rules regarding the use of reports.
Things are pretty different with financial accounting because reports are regulated according to state or national laws. Balance sheets, income statements, and cash flow statements are prepared according to financial accounting regulations. Organizations hire talented accountants to communicate their financial health with the public. Financial accounting errors can be pretty costly. Mistakes can put a company’s future in jeopardy if reports are not accurate.
Financial accounting rules are set by the Financial Accounting Standards Board in the United States of America (FASB). Professionals refer to financial accounting rules as generally accepted accounting principles of GAAP in the USA.
Creditors and investors use the financial statements of businesses to compare their performance. Companies must release financial statements regularly to maintain a consistent flow of their financial data.
As mentioned before, financial accounting information is public. Companies produce financial statements to serve various external users. Those users rely on regularly published financial data to assess the financial stability and growth of the subjected firm.
“Financial accounting reveals the performance of the entire company in the previous quarter. Managerial accounting reports serve specifically to the company’s management. Companies treat managerial accounting reports as confidential information. It is important to protect that information to prevent rivals from taking advantage of the company’s shortcomings.“
Business organizations use managerial accounting reports to assess how different departments are performing. If the data reveals inconsistencies, the management can make the required changes to ensure all departments perform as per company standards.
The following things are similar in financial and management accounting disciplines:
Students need to understand basic accounting methods and principles to become skilled financial or managerial accountants.
Financial accounting may have some similarities with managerial accounting, but both disciplines are pretty different. One targets external users to improve the company’s image and another serves internal management. Business organizations need both accounting methods to grow and achieve their financial goals.
Here are some best selling Managerial Accounting textbooks and test banks:
And Here are some famous Financial Accounting Test Banks: