How Financial Accounting Differs From Managerial Accounting

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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

  • Managerial accounting involves identifying, measuring, analyzing, interpreting, and communicating financial information to managers to help them set an organization’s goals.
  • Financial accounting involves recording and summarizing the stream of transactions and economic activity resulting from business operations and reporting it to investors and regulators.

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 an efficient directing of 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.

Managerial accounting is created for a company’s executives. Financial accounting is created for its investors, creditors, and industry regulators.

Past and Present Use

The information created through financial accounting is entirely historical. A financial statement contains data for a defined period of time.

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 Securities and Exchange Commission (SEC), establishes financial accounting rules in the United States. The sum of these rules is referred to as generally accepted accounting principles (GAAP).

This uniformity allows investors, lenders, and analysts to compare companies directly on the basis of their financial statements.

Moreover, financial statements are released on a regular schedule, establishing consistency of external information flows.

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 mid-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.
  • 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 the company’s 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 post-graduate 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 post-graduate 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.

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