Financial Accounting Vs. managerial accounting

Accounting is an important field that helps businesses manage their financial transactions. Financial accounting and managerial accounting both are essential, but their purpose and use are quite different. The main objective of financial accounting is to provide information to external stakeholders, whereas the focus of managerial accounting is on internal decision-making.

In this article we will discuss Financial Accounting vs. Managerial Accounting, and understand how the two differ. We will cover the objectives, uses, regulations, reports, and differences of both accounting types.

Introduction:- The role of accounting has become very important for every business. It helps businesses track their financial records, comply with tax laws, and take decisions. Financial accounting and managerial accounting both use financial data, but their purpose and audience are quite different.

The main objective of Financial Accounting is to provide information about the financial performance and position of the company to external stakeholders. The main focus of managerial accounting is to support internal decision-making, helping managers optimize their business operations.

Key Take ways:-

1. Financial accounting reports to external users (such as investors and creditors), and it follows standards such as GAAP (Generally Accepted Accounting Principles).
2. Managerial accounting reports to internal users (such as managers and executives) and is flexible, meaning it addresses the specific needs of the company.
3. Financial accounting focuses on history, while managerial accounting makes future forecasts along with past performance.
4. Financial accounting reports are concise and standardized, while managerial accounting reports are detailed and customizable.

2. Main Objectives of Financial and Managerial Accounting

Financial Accounting The primary objective of financial accounting is to accurately report the financial performance and position of the company. Financial accounting reports are prepared for external stakeholders such as investors, creditors, and regulatory bodies. These reports summarize historical data and show the financial health of the company.

The main objectives of financial accounting include:

Compliance Financial accounting ensures that the company fulfills legal and tax requirements, such as GAAP or IFRS standards.
Transparency These reports help investors and creditors to assess the financial stability and profitability of the company.
Investment Decisions Investors and lenders take investment decisions by looking at the financial data of the company.

Managerial Accounting The main objective of managerial accounting is to support internal decision-making. These reports help company managers optimize their operations, control costs, and improve profitability.

The main objectives of managerial accounting include:

Internal Decision-Making Managers get such detailed reports which help them in taking business decisions.
Budgeting and Forecasting Managerial accountants work with managers to create future plans and targets.
Cost Management These reports help the company to track and optimize its costs.

3. Past and Present Use of Accounting Data:-

Financial Accounting: Historical Focus:
Financial accounting reporting is purely historical. It summarizes the past financial performance of the company. Each report is for a defined period, such as quarterly or annually. These reports tell investors how the company has performed in the past.

Example A company’s income statement will show their total revenue, expenses, and profit that they earned during a financial year.

While financial accounting reflects history, investors also use the data to make predictions about the future. But there is no future forecast in financial accounting reports.

Managerial Accounting: Looking Ahead:
Managerial accounting is also future-oriented by analyzing past performance. It makes business forecasts and helps managers in taking future decisions. Managers do budgeting, forecasting, and planning for the future that will align their strategy.

Example A company can forecast future sales by looking at its past sales, or prepare cost and revenue projections for a new product launch.

4. Regulation and Uniformity

Financial Accounting: Highly Regulated:
Financial accounting has become much more regulated. The reason for this is that these reports are for external stakeholders, and these reports are released for public consumption.

In the United States, the Financial Accounting Standards Board (FASB) sets financial accounting rules, known as Generally Accepted Accounting Principles (GAAP). These standards ensure that a company’s financial statements are clear, consistent, and comparable.

Managerial Accounting: Flexible and Customized:
Managerial accounting reports are not required to follow any specific standard or rule. This is for internal users, and the company can customize it as per its requirements. This flexibility allows managers to best address their business needs.

Example One company is able to track its departmental expenses while another company is able to aggregate them. This is entirely a management decision.

5. Reporting Details and Characteristics

Financial Accounting: Concise and Aggregated:
Financial accounting reports are concise and standardized. These reports summarize overall performance and provide easy-to-understand information to external stakeholders.

Example Income statement shows total revenue and expenses for the quarter or year, and the balance sheet summarizes assets, liabilities, and equity.
Financial accounting reports are more transparent but contain less detailed information. These are primarily used to help external stakeholders understand the overall financial condition of the company.

Managerial Accounting: Detailed and Specific:
Managerial accounting reports are quite detailed and specific. These help internal stakeholders optimize their day-to-day operations. These reports try to track every aspect of the business, such as:

cost analysis

product profitability

operational efficiency

Example: A company is able to breakdown its production costs, such as raw material costs, labor costs, and overheads.

These reports provide more information to managers so that they can enhance their business processes.

6. Career Opportunities in Financial and Managerial Accounting

Both financial and managerial accounting career opportunities are available, but their job responsibilities and required skills are different.

Financial Accounting Careers:
Role Financial accountants prepare financial statements and ensure that the company follows legal and regulatory standards.
Certifications Certified Public Accountant (CPA), Chartered Accountant (CA).
Job Roles Financial Analyst, Controller, Accounting Manager, Auditor.

Managerial Accounting Careers:
Role Managerial accountants support managers by providing detailed reports and forecasts, which help in strategic decisions.
Certifications Certified Management Accountant (CMA), Chartered Institute of Management Accountants (CIMA).
Job Roles Cost Analyst, Budgeting Analyst, Financial Planner, Management Consultant.

Summary:- Financial accounting and managerial accounting both are important, but their purpose and use is quite different. Financial accounting informs external users about the company’s financial performance and position, while managerial accounting supports internal decision-making. Financial accounting follows regulations and standards, while managerial accounting is more flexible and customized.

Both accounting practices have their place very important, and every company needs both to manage its business efficiently.

Disclaimer:- This article is for general informational purposes only and should not be taken as professional accounting or financial advice. The information provided in this content is based on the author’s views and general knowledge, which is based on commonly accepted practices in financial and managerial accounting. While every effort has been made to ensure the accuracy and completeness of the information, the author does not guarantee that the content contains no errors or omissions. Readers should seek advice from a qualified accountant, financial advisor, or legal professional for their specific circumstances. This article does not cover every possible situation or nuance of financial and managerial accounting and is not a substitute for formal education or expert consultation.

The views expressed in this article are those of the author and do not reflect the views of any associated organization or entity.