Financial accounting is the process that summarizes, analyzes, and reports financial transactions to existing or potential stakeholders. Contrary, managerial accounting measures, interprets, and communicates information to management to help them plan, make decisions and manage risks. In a nutshell, both financial and managerial accounting involves gathering financial information and presenting it to the target audience in form of financial reports. As much as these definitions are simple, they are too formal for individuals that have never stepped into an accounting class.
Various differences exist between financial accounting and managerial accounting. To start with, financial accounting audience is external while the target audience of managerial accounting is internal. This implies that financial accounting reports its business financial health to existing and potential creditors, leaders, and investors. These statements act as collateral to external parties funding or potentially going to fund the company. On the other hand, managerial accounting targets internal audiences. According to Davis, C. & Davis, E. (2019) , managerial accounting aims at creating internal company reports that assist managers in the company to run its operations which consequently affect performance and profitability. It plays a significant role in managing cash flow. Most companies require adequate cash to meet their needs such as paying debts, reinvesting in its future, paying dividends, and adding retained earnings.
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Additionally, financial accounting reports previous events and transactions while managerial accounting focuses on the future. In this case, financial accountants collect reports such as income statements and balance sheets to summarize all financial statement that have occurred or close equity, liabilities or asset balances. In contrast, managerial accounting help accountants to make reports that help the management to formulate decisions that influences the future of the company. Budgets help the company to identify how it can divide its resources in various departments.
More so, financial accounting scope is wide while the management accounting scope is narrow. Financial accounting scope is wide because it consolidates different business units and departments results together to allow stakeholders comprehend the big picture of the entire business. On the other hand, the scope of managerial accounting is narrower because management accountants always divide the organization into segments as well as divisions to offer managers of various areas comprehensive reports that can assist them.
In financial accounting, accuracy and objectives are the most common names used. It utilizes precise financial statements and give are precise and give a clear view of the company business at the end of the year. Managerial accounting prioritizes on being relevant and observing time. In context, a super accurate report may not be relevant if it reaches a manager late. This gives management accountants an opportunity to utilize shortcuts to convey their assessment on time. In this type of accounting, accountants are allowed to use shortcuts because their analysis and reports are internal and confidential and less regulated as compared to financial accounting ( Jiambalvo, 2019 ). In contrast, financial accounting is stringently regulated. Financial accountants strictly adhere to GAAP and IFRS standards and principles that guide accountants on recording and presenting information in cash flow statements, balance sheets and income statements. Since the user of financial statements is external, it is important to protect them from misinformation and fraud by being audited. Regarding financial statements, financial accountants can become useful when a company exceed a certain point while management accountants are not technically needed. Companies may not necessarily need them as much as they can be vital when it comes to strategy and future decision-making.
Financial accounting helps external users particularly investors to make economic decisions to invest in the company or check the profitability of the company by checking on the company’s audited financial statements. Financial accounting also helps creditors to check the liquidity of the company in order to lend the money to the company. These situations are applicable for financial reporting purposes ( Garbowski et al ., 2019). On the other hand, managerial accounting concentrates on the company’s internal management. Publishing reports for companies makes them more effective and efficient in their operations. The managerial accountant prepares budgets for a certain period; make relevant sensitivity, cost analysis as well as performing cot-volume profit (CVP) analysis. Managerial accounting also includes financial statement analysis to check if the company is in line with the industry.
In summary, financial accounting is different from managerial accounting. Financial accounting helps external users such as creditors and stockholders, reports their financial abilities using financial statements, submit financial reports on an interim or annual basis, produces company reports in line with the GAAP, and accountants are verified by a certified public accountant (CPA). On the other hand, managerial accounting is done for a specific purpose, helps internal users, and reports its financial abilities using costing and budgets, and produces reports when needed by the company. Managerial accounting also produces department reports that are required by the company to make decisions. Even though there are distinct differences between financial and managerial accounting, they both play a significant role in the company. They both help the company to monitor expenditures and income, ensure that the company complies with government regulations and attract investors to the company. Additionally, both financial and managerial accounting helps the company to develop budgets and future projections. Therefore, it is critical to maintain accurate and up-to-date financial records to keep the business afloat.
References
Davis, C. E., & Davis, E. (2019). Managerial accounting . John Wiley & Sons.
Garbowski, M., Drobyazko, S., Matveeva, V., Kyiashko, O., & Dmytrovska, V. (2019). Financial accounting of E-business enterprises. Academy of Accounting and Financial Studies Journal , 23 , 1-5.
Jiambalvo, J. (2019). Managerial accounting . John Wiley & Sons.
