Financial and managerial accounting are two of the four largest branches of the accounting profession. Both have some similarities, such as tracking transactions, recording them, and even reporting them to a certain level. However, some factors keep them apart, such as compliance, accounting standards, and target audience, which we will cover in a detailed article. From definitions to differences and similarities, we are giving a complete overview of both types of accounting. Let’s take a deeper dive in this blog.
What is Financial Accounting?
Financial accounting is a systematic way of recording, summarizing and presenting financial transactions of a business entity to stakeholders such as investors, creditors, regular bodies and others.
This usually involves recording business transactions, summarizing and preparing a report on the same information for reconciliation resulting from business operations over time, especially a year, examining business growth and presenting to investors and other external parties.
What is Managerial Accounting?
Managerial accounting is another branch of accounting that involves practicing identifying, measuring, analyzing, interpreting, and communicating financial information to managers to pursue an organization’s goals.
Since the goal of managerial accounting is to help users inside the organization make educated business decisions, the approach is very different from financial accounting. Enhancing the quality of information provided to management regarding business operation indicators is the goal of managerial accounting. Managerial accountants make use of data on the price and sales income of the company’s products and services.
Comparing and Contrasting Managerial and Financial Accounting
Managing the business’s accounting, keeping track of transactions, and recording and reporting are the types of accounting, regardless of the type: Financial or managerial accounting. This section covers the differences and overlapping factors between both professions.
Overlapping factors between both accounting strategies
Although the financial and managerial accounting differs from each other but have lots of similarities in both. Let’s uncover what are these:
• Quantifying business and transaction results.
• Dealing with expenses, assets, liabilities, cash flows and financial statements.
• Determining and measuring costs.
• Preparing financial reports based on business databases.
What differentiates the Financial & Managerial accounting?
Financial management involves keeping track of every transaction and maintaining records for compliance to report outside the firm. Meanwhile, managerial accounting is more about gathering financial data for the manager to make better decisions. There are also other factors that differentiate both accounting methods which we are discussing below:
Systems
Profit generation is the main objective of financial accounting, not the system as a whole. In contrast, managerial accounting focuses on locating bottleneck operations (operations operating at their maximum capacity, such as those that cannot accept additional work) and resolving bottleneck issues to increase sales and profits.
Reporting focus
Financial accounting reports are intended for internal dissemination among a company’s investors, financial institutions, and regulators. They concentrate on producing financial statements within a given time limit. Managerial accounting reports, on the other hand, are typically given to managers and senior employees and concentrate on forecasting. They are more closely tied to operational reports.
Frequency
Because managerial accounting focuses on operational reporting, managerial accountants report more frequently or whenever stakeholders want to make decisions and do not follow any specific period. Financial accountants, on the other hand, create financial statements at the conclusion of an accounting period, which may be quarterly, annual, or monthly.
Standards
While financial accounting is for both internal and external consumption, management accounting does not need to adhere to standards when it comes to internal consumption. It must therefore adhere to accounting rules, including those pertaining to general principles, obligations, revenue, equity, etc.
Period
Managerial accounting examines financial data to create predictions about the future, whereas financial accounting analyzes financial data to look at the past. However, since creditors and investors use financial statements to create projections, this does not imply that financial accounting solely examines the past.
Valuation
While managerial accounting examines assets and liabilities to determine a company’s productivity and profitability, financial accounting concentrates on the total worth of a company’s assets and obligations.
Which One is More Challenging: Financial or Managerial Accounting
In general, managerial accounting is simpler than financial accounting. This is mostly due to the fact that managerial accounting is primarily for internal use and entails forecasting and budgeting. Financial accounting, on the other hand, is required to adhere to GAAP standards and create reports for both internal and external customers, including creditors, lenders, investors, and regulators.
This does not, however, make managerial accounting a “simple” area of accounting because it takes expertise and extensive training to fully comprehend the elements that influence a company’s success or failure.
Summary
Before hiring an accountant, knowing the specialty is crucial to managing your business. If you are confused between financial and managerial accounting, the above information in the blog will help you get a detailed overview of both. Hopefully, the guide has helped you know the similarities and differences between both to be clear about these professions.
If you need any further help, connecting with accounting professionals is recommended. Dial TFN and talk to an expert now!
Leave a Reply