Managerial Accounting versus Financial Accounting
Accounting has four main sectors. Financial accounting is documenting and reporting a company's money-related transactions over a specified period of time. Managerial accounting, commonly referred to as cost accounting, consists of collecting and analyzing a company's financial data in order to make better business decisions. Auditing means compiling and analyzing a company's financial records to determine if the company is following accounting standards. Tax accounting is concerned with whether a company's reporting follows rules imposed by local, state, and federal regulatory bodies.
Financial accounting and managerial accounting differ in many ways. Businesses use financial accounting as a type of external reporting to inform the public of the company's well-being and performance. Accurate financial accounting allows investors and creditors to make informed decisions, such as whether to buy stock in the company or offer it a loan. In contrast, managerial accounting is concerned with internal reporting to help managers make better business decisions. Managerial accounting assists managers in planning, goals, efficiency, and overall profitability.
Financial accounting is highly regulated because investors use its data to assess companies and decide whether to invest in them. Misleading financial reporting can lead to market instability and even defraud investors. However, in managerial accounting, a company has full discretion to plan, budget, and forecast without complying with any regulatory body. Companies do not disclose to the public the financial data that comes from managerial accounting.
Another example of how financial accounting and managerial accounting differ is that managerial accounting is designed to create future budgets. Financial accounting, on the other hand, is more concerned with analyzing past data for a specific period of time. Managerial accounting is much more flexible because it analyzes financial data for a period of time but also creates new projections based on that data.
Also, the information that companies compile for financial accounting typically consists of the bare minimum information the company needs to report to be in compliance with the law. Managerial accounting records typically contain far more detail, especially as it is used for internal decision-making and can give specifics about individual products or departments within the company.
Contrasting Financial Accounting and Managerial Accounting
| Financial Accounting | Managerial Accounting (Also Called Cost Accounting) | |
|---|---|---|
| Goal | Inform public on company's well-being and performances | Help managers make better business decisions |
| Primary Users | External | Internal |
| Regulated | Generally accepted accounting principles (GAAP), which are a combination of accounting principles, standards, and procedures that govern the preparation of financial statements | Not regulated by outside sources |
| Detail | Contains few details | Contains extensive detail |
| Required by Law | Yes | No |
| Time Emphasized | Past financial data | Future financial goals |
| Frequency | Usually either quarterly or annually | As management sees fit |
| Scope | Entire company | Can be narrowed by segment |
There are a number of differences between financial accounting and managerial accounting. The most important difference between the two branches of accounting is their purpose.
Uses of Managerial Accounting
Organizations use managerial accounting for decision-making and to identify efficiency. The flexibility of managerial accounting makes it an invaluable resource. For example, companies can decide on the amount of detail needed for these internal reports. They also can focus on specific segments of a company, such as a certain product or manufacturing location, to determine whether costs need to be adjusted and whether the company's resources would be better applied elsewhere.
Managerial accounting usually starts with analyzing past data, just as financial accounting does. However, due to the flexibility of managerial accounting, managers can use this data and expand or reduce it for forecasting purposes. This allows the company to identify specific profits and expenses as they relate to certain segments of the business. A company can then adjust its resource allocation in hopes of decreasing its expenses and, in turn, increasing its profitability. This also provides an opportunity for companies to identify their resources to ensure optimal efficiency. Analyzing this data is crucial for a company to plan, budget, and ensure optimal performance for future periods.
Not only is managerial accounting helpful in evaluating company performance as it relates to products or departments, but it also helps a company evaluate the performance of its managers. For instance, sometimes internal reporting information reveals that a company should be more profitable or efficient than it really is. This discrepancy could be due to factors that are difficult to measure, such as management behavior. Management behavior can affect a variety of factors, such as employee morale and ethical standards. This specificity and sharp focus further demonstrate the applicability and usefulness of managerial accounting.