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Financial Accounting vs. Managerial Accounting: An Overview
Financial accounting and managerial accounting are two of the four largest branches of the profession, in addition to tax accounting and auditing. Despite many similarities in approach and usage, there are significant differences, most of them centering around compliance, accounting standards, and target audiences.
Key Takeaways
- Financial accounting’s focus is on informing those outside of a company, such as investors, creditors, and industry regulators. Managerial accounting’s main objective is to produce useful information for a company’s internal decision-making.
- Financial accounting is wholly historical. Managerial accounting, on the other hand, looks at past performance but also creates business forecasts.
- Financial accounting reports are highly regulated since they are released for public consumption, whereas managerial accounting reports are only circulated internally.
- Financial accounting reports tend to be aggregated, concise, and generalized. Managerial accounting reports, however, are highly detailed, technical, specific, and even exploratory.
Financial Accounting
Financial accounting is the branch of accounting focused on recording, summarizing, and reporting a company’s financial transactions. Its primary purpose is to provide an accurate and standardized overview of a business’s financial performance and position over a specific period. This information is compiled into financial statements, such as the balance sheet, income statement, and cash flow statement.
The process of financial accounting follows established rules and principles, most notably the Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). By adhering to these standards, financial accounting provides stakeholders like investors, creditors, regulators, and management the reliable data needed to make informed decisions regarding the company’s operations and future prospects.
Beyond internal management, financial accounting plays a crucial role in regulatory compliance and transparency. Publicly traded companies are required to disclose their financial information regularly to maintain investor confidence and meet legal obligations.
Managerial Accounting
Managerial accounting is the branch of accounting focused on providing internal management with relevant financial and non-financial information to assist in planning and decision-making. Unlike financial accounting which is aimed at external stakeholders, managerial accounting delivers detailed reports tailored to the specific needs of managers within an organization. These reports can include budgets, forecasts, cost analyses, and performance evaluations.
The key function of managerial accounting is to help managers make informed decisions that improve efficiency and profitability. It involves analyzing costs related to production, operations, and projects. It uses tools like variance analysis, break-even analysis, and activity-based costing which are highly flexible given a specific business need.
Managerial accounting is not bound by external reporting standards, giving organizations the flexibility to design reports that suit their unique operational needs. This customized approach allows for timely and relevant information that supports day-to-day management and long-term planning.
Fast Fact
Financial statements generated via financial accounting can be useful for analysis if compared over time, compared across companies, or compared against industry benchmarks.
Key Differences
Main Objectives of Both Accounting Practices
The main objective of managerial accounting is to produce useful information for a company’s internal decision making. Business managers collect information that feeds into strategic planning, helps management set realistic goals, and encourages efficiently directing company resources.
Financial accounting has some internal uses as well, but its focus is on informing those outside of a company. The final accounts or financial statements produced through financial accounting are designed to disclose the firm’s business performance and financial health.
Therefore, the primary key difference between the two are the ultimate purpose of the study. One is more useful for standardized, external reporting, while the other is better for internal strategic decision-making.
Past and Present Use
The information created through financial accounting is entirely historical. A financial statement contains data for a defined period of time. Meanwhile, managerial accounting looks at past performance but also creates business forecasts. Business decisions are informed by this type of accounting. Investors and creditors often use financial statements to create forecasts of their own. In this sense, financial accounting is not entirely backward-looking. Nevertheless, no future forecasting is allowed in the statements issued by a financial accountant.
Regulation and Uniformity
The biggest practical difference between financial accounting and managerial accounting relates to their legal status. Reports generated through managerial accounting are only circulated internally. Each company is free to create its own system and rules on managerial reports.
In contrast, financial accounting reports are highly regulated, especially the income statement, balance sheet, and cash flow statement. Since this information is released for public consumption and is highly anticipated by investors, companies are very careful about how they make calculations, how figures are reported, and in what format those reports appear.
The Financial Accounting Standards Board (FASB), under the aegis of the U.S. Securities and Exchange Commission (SEC), establishes financial accounting rules in the United States mentioned earlier called GAAP. GAAP only dictates financial accounting and not managerial accounting.
Reporting Details
Financial accounting reports tend to be aggregated, concise, and generalized. Information is simultaneously more transparent and less revealing. This is not the case with managerial accounting, as there can be reasons to highlight information that is particularly relevant or even downplay information that is not. For example, you might want to bury lower bonuses in an overall number for expenses to avoid angering midlevel to lower-level employees who peruse the report.
Managerial accounting reports are highly detailed, technical, specific, and even exploratory in nature. Companies are always looking for a competitive advantage, so they may examine a multitude of details that could seem pedantic or confusing to outside parties.
What Are the 4 Types of Accountant?
There are four main specializations that an accountant can pursue:
- A tax accountant works for companies or individuals to prepare their tax returns. This is a year-round job when it involves large companies or high-net-worth individuals (HNWIs).
- An auditor examines books prepared by other accountants to ensure that they are correct and comply with tax laws.
- A financial accountant prepares detailed reports on a public company’s income and outflow for the past quarter and year that are sent to shareholders and regulators.
- A managerial accountant prepares financial reports that help executives make decisions about the future direction of the company.
What Do Accountants Do All Day?
Whether they are managerial accountants or financial accountants, they spend much of their time keeping the books. They are responsible for accurately recording every transaction that a company makes, whether it’s paying a contractor or buying a new machine.
Their deep understanding of company transactions allows them to specialize in financial reporting or managerial reporting.
What Are the Highest-Paid Jobs in Accounting?
As in any profession, there are steps up the ladder in accounting, some of them dependent on postgraduate education as well as professional experience. The top three:
- A company controller is the head accountant and is deeply involved in the company’s management decisions.
- A certified management accountant (CMA) has special training in strategic thinking and business analysis.
- A certified public accountant (CPA) is a state-licensed professional who has completed postgraduate work and has some accounting experience. (Outside the U.S., this is a chartered accountant.)
The Bottom Line
The key differences between managerial accounting and financial accounting relate to the intended users of the information.
Managerial accounting information is aimed at helping managers make well-informed business decisions on the direction of the company. Financial accounting reports a company’s performance for a specific period of time and does it in the most straightforward way possible.
Financial accountants must conform to certain standards to maintain the company’s publicly traded status. Even privately held companies in the U.S. must conform to GAAP standards in order to meet the disclosure requirements of financial institutions that they borrow money from.
Because managerial accounting is not for external users, it can be modified to meet the timely specific needs of its intended users. This may vary considerably by company or even by department within a company.
