Differences between Financial Accounting and Managerial AccountingThe field of business accounting is divided into financial accounting and managerial accounting. They are different by purpose, target audience, and standards.
The purpose of business accounting is to provide the company’s management with valid and up-to-date information regarding the company’s operations and financial performance. This information is needed for the decision-makers to have a firm ground for designing the strategies for future operations.
The major purposes of business accounting are identifying, measuring, recording, classifying and summarizing financial transactions and events as well as further analyzing, interpreting and communicating the gathered financial information. All this is needed for a business to have enough information to base strategic decisions upon. In addition, financial accounting information is required to be issued according to Generally Accepted Accounting Principles.
Financial accounting works mostly for external users. They may be investors, creditors, auditors or analysts. This type of business accounting is supposed to correspond to specific principles and guidelines – Generally Accepted Accounting Principles (GAAP). These principles outline the major rules according to which the company’s accounting processes should be conducted and managed. Besides, they define the standards and terms for issuing reports on the company’s financial information.
The information provided by financial accounting has a general informative purpose. It does not contain many estimates, is used mostly for investment and credit decisions, and is issued on a regular basis - annually or quarterly. In particular, financial accounting provides financial statements that include information about the loss and profit of an organization, balance sheets, and cash flow statements for the reporting periods.
Unlike financial accounting, managerial accounting is aimed at internal users, such as the company’s management or board of directors. Its purpose is to provide information which will help to control the company’s operations and make decisions.
Managerial accounting reports are prepared on an as-needed basis, and contain more detailed information than those for financial accounting. Such information is needed for the management to have a full picture of the current state of the whole organization or a specific project. In addition, managerial accounting statements do not have to comply with GAAP or any other regulations, and internal cost/benefit evaluation determines what kind and how much information they should report. Examples of managerial accounting reports are sales forecasting or budget analysis reports.
So, an important feature that differentiates the two types of business accounting is that financial accounting provides historical data and current financial information of the company for a wide range of users, while managerial accounting includes analysis and estimates for the future, focuses on providing confidential data for taking decisions to influence upcoming decisions and future operations.