Financial accounting (also known as financial reporting) is an activity of collecting, processing, analyzing, and communicating financial information about a business to the potential investors (Gupta, 2012). On the basis of the financial reporting, investors decide whether it will be profitable to invest in the company. On the other hand, managerial accounting is the process of identifying, calculating, analyzing, and communicating information to managers in order to achieve the aims of the establishment (Louderback & Holmen, 2003; Institute of Management Accountants, 2008). Both financial accounting and managerial bookkeeping are necessary for the business to prosper, even though they serve to accomplish different purposes to say the least (Gupta, 2012). Although these procedures are interconnected, and both serve to a key purpose of earning as much profit as possible, they are completely dissimilar by almost all the criteria.
The principal difference between managerial and financial accounting is their content. Financial accounting comprises statement about cash inflows and outflows, statement about profit and loss, and statement about assets, liabilities and equity of the company (Gupta, 2012). At the same time, managerial accounting consists of calculating which operations would require less costs and bring larger revenues to the company, performance reports, strategic, financial, and operational plans (Jiambalvo, 2010). While financial reporting concentrates solely on the objective exact past events, managerial accounting must also focus on current and future trends in order to provide for efficient managerial decisions. Consequently, managerial accounting takes into consideration both objective and subjective information. Financial reports must focus on the company as a whole, when managerial reports can also consider only certain segments of the company (Warren, Reeve & Duchac, 2016).
Delegate your assignment to our experts and they will do the rest.
Another important distinction between the two is the procedure with which financial and managerial accounting are conducted. While the financial accounting must strictly adhere to the Generally Accepted Accounting Principles, managerial accounting is more flexible and generally does not have to comply with any standards, except for the internal ones if they are to be considered according to the company’s rules (Jiambalvo, 2010). The reasoning for such distinction is the nature and purpose of both procedures.
As for the audience of the reporting, financial accounting is targeted at the boards of directors, financial entities, stockholders, other investors, and the general public. Managerial accounting is directed solely at the internal workers of the company with different managerial positions (Jiambalvo, 2010).
The purpose of the financial accounting is to provide financial information about the reporting entity that is necessary for the external actors to decide whether they it would be profitable to cooperate with the reporting company (Gupta, 2012; Warren, Reeve & Duchac, 2016). The goal of the managerial accounting is focused on the company’s managers. Managerial accounting primarily intends to help them control the company and make better decisions (Jiambalvo, 2010).
In conclusion, while managerial and financial are both necessary tools for the business projects, they have a lot differences. Particularly, the content of both comprises distinct parts of the company’s activity: financial accounting focuses on the objective past events when managerial accounting can include subjective information and make prognosis for future events. Financial accounting is bound with Generally Accepted Accounting Principles, while managerial accounting has to obey to internally accepted standards of such procedure. The audience of the financial reporting are external investors, members of the directors’ boards, other financial entities and the public. At the same time, managerial accounting is targeted at internal managers of the establishment. The principal difference between the two reporting procedures is their distinct purposes: while managerial accounting primarily focuses on making this firm as profitable as possible, financial accounting aims at informing the external audience about the indirect consequences of the managerial accounting, that is, company’s profitability.
References
Gupta, P. (2012). Principles of Business Financial Accounting . AuthorHouse.
Institute of Management Accountants. (2008). Statement on Management Accounting No. 1A, Definition of Management Accounting . Colorado Springs, CO: Shepard’s/McGraw-Hill.
Jiambalvo, J. (2010). Managerial Accounting . John Wiley & Sons, Inc.
Louderback, J. & Holmen , J. (2003). Managerial Accounting . Thomson/South-Western.
Warren, C., Reeve, J. & Duchac, J. (2016). Financial&Managerial Accounting . Cengage Learning.
