Financial Accounting Vs Managerial Accounting: Things You Should Consider as an Entrepreneur
In any business firm, accounting management is an essential component for it every day. Essentially, it is the precise and accurate recording of the economic transactions of a company. Though there are different types of accounting and they have multiple purposes but its core characteristics are the same. But for the last few years, the comparison between Financial Accounting Vs Managerial Accounting has always been a topic of discussion in the business industry.
So, today in this article, we will perform the battle of Financial Accounting Vs Managerial Accounting.
Here, you will get all the insightful information & differences about financial & managerial accounting and what features make them apart.
A Brief Introduction to Financial Accounting & Managerial Accounting
The focus in Financial Accounting is building detailed financial statements that can be presented outside the company. The accounting process must abide by some particular rules by the GAAP (Generally Accepted Accounting Principles).
A chart of accounts has been created which will be used by financial accounting. This helps to calculate the factual financial statements of the company within a specific time.
Tracking receivable balances of accounts and building invoices are part of this accounting type. You will get different compiled reports, like-
- Cash-flow statements
- Income statements
- Stockholder investment statements
- Balance sheets
The goal of Financial Accounting is displaying the financial strength of business to engaged third parties like-
- Financial institutes
- Industry officials
- And more
The internal needs of a business are maintained by Managerial Accounting. Mainly, it deals with the future of a company and makes plans which are profitable for the business in the long run.
It helps the business to:
- Determine income
- Set estimated selling prices
- Recognize opportunities
- Run sleekly
- Focus on finance allocation
- Set corporate strategies
In a nutshell, it helps the manager to take further decisions. Moreover, Managerial Accounting sometimes needs Financial Accounting for:
- Building & streamlining operations
- Determining budgets
- Strategic plans
- Solving logjams
- And more
Financial Accounting Vs. Managerial Accounting
|Financial Accounting||Managerial Accounting|
|The main focus of Financial Accounting preparing financial statements of a business to present financial information to interested third parties.||Managerial accounting system provides information to the managers to make internal decisions like- policies, plans, and business strategies.|
|Present monetary information.||Present both monetary and non-monetary information.|
|All reports are case-based.||All reports are based on model and abstract.|
|Financial accountancy needs to be approved by law.||Managerial accounting doesn’t need any law.|
|Both internal and external parties can use it.||Internal parties can use it.|
|Focuses on the entire organization.||Focuses on department, sales, operations, specific activities, products and more|
|Financial statements should derive within a set period, like- a fiscal year or quarter.||There is no set period of reporting managerial accounting reports.|
|Need to publish and audit by statutory auditors||Don’t need to publish or audit by statutory auditors.|
|The statement format is specified||The format is not specified|
|Financial accounting reports work for the company’s profitability and efficiency.||Managerial accounting reports work on field of lacking, weaknesses and problems.|
|Financial Acc. Examples: |
Cash flow statement
|Managerial Acc. Examples:|
The Core Differences Between Financial Accounting Vs. Managerial Accounting
We have seen the basic difference between these two accounting systems. Now its time for us to dig in a little deeper. The single lined points above may seem confusing to you. Thus we have made a comparison table on Financial Accounting vs. Managerial Accounting and it will help you to understand in the wide view.
Looking Forward and Looking Back
Handling financial activity is quite different in managerial and financial accounting.
Managerial accounting works for upcoming budgets, strategic plans, and estimated future income and expenses. Though it looks forward it can also give insightful information for the present. But it hardly searches for the past.
On the other side, financial accounting investigates what the company has already achieved. It goes through the past and that is the realm of it. When someone reads a financial accounting report, he/ she discovers the reports of last year, last week, or last day.
Deadline and Pre-set Reporting Time
There is no control of reporting deadlines on managerial accounting. A managerial accounting team can create reports for the company at any time, like- monthly, weekly, or even daily.
In contrast, before creating a financial statement it will have pre-set reporting periods. Usually, the period ends every three months (Once per Quarter).
Uniformity vs. Regulation
The largest functional distinctions between financial and managerial accounting is their legal status.
Managerial reports are generated only internally. The company is free to produce its rules and regulation on managerial reports which means you will not get any centralized regulating reports. Plus, it may even be hard to find what you need.
On the other hand, you will get highly regulated reports in financial accounting. The essential reports like- cash-flow, income statement, and balance sheets are made underneath financial accounting. If these records are not perfectly regulated, the investors and other financial parties can misunderstand the financial health of the company.
Most importantly, leaders directly analyze companies based on financial accounting reports.
Asset Productivity and Asset Valuation
To know the net worth of a vacuum cleaner after 3-years in your production line, you have to use financial accounting to understand the situation.
Again, if you need to know the money worthiness of buying a vacuum cleaner price, you have to go through managerial accounting systems.
Estimates Vs. Facts
Those who used to attend the budget meeting, they know the accurate digit of a budget is pretty unpredictable. Usually, budget estimates are produced according to company requirements. Thus, the managerial statements create based on estimation.
On the contrary, financial statements should be accurate as the company has to show it to third parties. There is no place for estimation in financial accounting.
Solving Issues Vs. Profitability
Accounting is a major part of a business. And, each company faces problems in the accounting sector. At that time they need managerial accounting. Basically, it is expertise in finding out the problem and fix them delicately.
However, the only concern of financial accounting is profitability on the business. Whereas you can get your business efficiency information through managerial statements.
High Standards Vs. No Standards
To create managerial statements, you have to maintain any federal, state, or local standards. The standard is not that mandatory as it will not be shown publicly.
But on the other side, financial accounting rigidly controlled by a huge number of basic, intermediate, and advanced standards of accounting.
Similarities of Managerial and Financial Accounting
Now we already know these two accounting systems have several differences. But they are also similar in a few sectors as well. However, most companies use both of them for profitable and effective business purposes. More similarities include:
- Performance evaluation
- Handled by internal management
- Uses the same branch of accounting
- Displays the position of the company
Phew! The post is almost at the end of its road. In a nutshell, if you want to run a successful business with a cristal clear calculation of accounting, then you have to use both of them. Whether you need to predict accounting statements or figure out the whole company’s previous accounting history, financial and managerial accounting can handle them smoothly. But the battle of Financial Accounting vs. Managerial Accounting will remain the same.
And, definitely, in order to get the statements, you need to hire professional accountants or avail a reliable yet powerful accounting software.
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Also, if you have any thoughts or feedback related to this content, feel free to let us know in the comments below.