What is the difference between financial accounting and managerial accounting?

by matteo.zboncak , in category: Taxation and Accounting , a year ago

What is the difference between financial accounting and managerial accounting?

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1 answer

by ena.rippin , a year ago


Financial accounting and managerial accounting are both branches of accounting that serve different purposes and audiences within an organization. Here are the main differences between the two:

  1. Purpose:
  • Financial accounting: The main purpose of financial accounting is to provide accurate and reliable information about the financial performance and position of a business to external stakeholders such as investors, creditors, and regulators. The information is presented in the form of financial statements.
  • Managerial accounting: The primary purpose of managerial accounting is to provide relevant and timely information to internal stakeholders such as managers, executives, and employees. This information is used for decision-making, planning, controlling, and evaluating the performance of the organization.
  1. Users:
  • Financial accounting: External users, including investors, creditors, lenders, regulators, and shareholders, use the financial statements for assessing the financial health, profitability, and liquidity of the company. These users typically have limited access to detailed financial information.
  • Managerial accounting: Internal users, such as managers, executives, and employees, utilize managerial accounting information for making decisions related to pricing, product line profitability, cost control, budgeting, and resource allocation within the organization. They have access to more detailed and customized information.
  1. Reporting:
  • Financial accounting: Financial accounting follows standardized principles and rules, predominantly governed by Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). The financial statements, including balance sheet, income statement, cash flow statement, and statement of changes in equity, are prepared periodically (quarterly, annually) and reported to external stakeholders.
  • Managerial accounting: Managerial accounting does not have strict guidelines or regulations to follow, allowing for a more flexible and customized reporting. Reports are prepared on an as-needed basis and can include budget reports, variance analysis, cost reports, performance reports, and forecasts.
  1. Focus:
  • Financial accounting: Financial accounting focuses on providing historical and objective financial information, focusing on past transactions and events. It looks at the overall financial picture of the organization and ensures compliance with external reporting requirements.
  • Managerial accounting: Managerial accounting is forward-looking and emphasizes the analysis of data with a focus on planning, controlling, and decision-making for the internal operations of the organization. It includes non-financial measures and qualitative information to support managers in making informed choices.

In summary, financial accounting is directed towards external stakeholders and focuses on the organization's financial performance, while managerial accounting is targeted towards internal stakeholders and provides information for decision-making and operational control within the organization.