What is the Difference Between Financial and Managerial Accounting?
There are many differences between financial accounting and managerial accounting even though there are some areas of overlap between the two disciplines. Understanding the difference between these two methods will help business owners to better decide what type of accounting is needed under different circumstances, especially for accounting outsourcing. A business owner who is seeking a business loan would need to have his accountant prepare financial statements that document past financial performance, rather than a managerial accounting report such as a budget, which focuses on planning. Here are three ways how management accounting differ from financial accounting:
1) Financial and Managerial Accounting Differ in Purpose
The most important difference between financial and managerial accounting is the purpose for each type of accounting. While both are used for decision-making purposes, financial accounting is more useful for analytical purposes, while managerial accounting is more focused on future planning. Financial accounting involves the numerical documentation of transactions that have occurred within a specified timeframe in the past. This includes the preparation of common financial statements such as balance sheets, income and expense statements or profit and loss statements, as well as cash flow statements.
On the other hand, managerial accounting is more concerned with estimates and projections. Good examples of managerial accounting reports are budgets or cash flow projections. These reports help with planning and goal setting.
2) Different End Users for Financial and Managerial Accounting
While the finished products of financial accounting are useful to both internal (in the organization) as well as external (outside of the organization) users, managerial accounting is only useful to the decision-makers within the organization or small business accounting. They are of little value to external users. For this reason, management may rely on budgets to determine the most appropriate course of action going forward. At the same time, if a business is seeking external funding, or seeking investors, it is usually the financial statements which help those investors or creditors make financing or investment decisions.
An organization’s budget is usually of no use to an investor who is relying on past performance as a basis for making an investment decision. Investors, on the other hand, are more interested in financial statements.
3) Difference in Scope
Managerial Accounting is used mainly at a departmental or geographical level, while Financial Accounting tends to have more of a companywide focus. Take for example monthly financial statements including the income & expense statement, the balance sheet and the cash flow statement. All these reports span the performance of the entire organization whereas budgets may be prepared for each department within an organization or for each branch of an organization based on its specific geographical location.
Summary: Managerial Accounting vs Financial Accounting
While there are similarities between financial and managerial accounting, there are significant differences. Financial and managerial accounting differ in purpose, end users, as well as scope. Financial accounting is more concerned with analytical assessment of past organization-wide performance while managerial accounting has a forward-looking approach, with a focus on producing realistic estimates and projections of the financial impacts of future activities. Both financial and managerial accounting are necessary and beneficial to business owners.