Managerial accounting and financial accounting are two different branches of accounting that have different purposes, target audiences, and reporting procedures. Both fields provide critical financial information; however, they serve a different purpose in an organization.
Here is a detailed definition and comparison of the two along with examples to provide an explanation of how each type of accounting works.
What is Managerial Accounting?
Managerial accounting, also known as management accounting, gives information to internal stakeholders such as managers and executives. This information is then used to make the best possible business decisions. Managerial accounting prepares reports and analysis for the purpose of planning, control, and evaluation of business operations to aid in making strategic decisions. It looks for future prospects rather than past performance for enhancing the operational effectiveness of the organization.
What is Financial Accounting ?
Financial accounting involves recording, summarizing, and presenting financial information to the outside stakeholders of investors, creditors, regulators, and tax authorities. Finances accounting is used in building standard financial statements that suit a balance sheet, an income statement, and cash flow statement portraying a company’s health based on its financial status over any given period. The transactions are recorded in conformance with strict regulations and rules, which may be based on GAAP or IFRS, and should be transparent and consistent.
Purpose and Audience
Managerial Accounting: Its core purpose is to aid in internal decision-making. The reports created in managerial accounting are used internally by management to make decisions about business strategies, process improvements, and performance optimization.
Financial accounting: The primary purpose is to let outside investors understand a company’s financial health and its position on profitability and its capacity to pay its debts, if due, that is. Reports from the area of financial accounting help these investors, creditors, as well as regulators to determine if it is profitable or solvent in general. Types of reports
Managerial Accounting: Offers several internal reports in the following fields, namely budgetary estimations, variance analyses and cost-benefit analysis. The format can be very different and, in this regard, it is always prepared according to the standard requirements of the management but not on standardized formats.
Financial Accounting: The business firm generates standardized financial statements known as income statement, balance sheet, and cash flow statements. The reports have to meet standardized formats. Such reports are standardized with the help of GAAP or IFRS so that they are comparable among the eyes of the multiple stakeholders.
Frequency and Period of Reports
Managerial Accounting: The frequency of preparation of reports is dependent upon the needs of management; in some cases, it is even prepared on a daily or weekly basis. Since the reports are for the support of internal decision-making, the flexibility in timing is greater.
Financial Accounting: The financial statements are prepared mainly on periodical basis such as quarterly or annual in order to fulfill the requirement of external reporting. The reports are related to fixed periods and become ready when the respective period is over.
Past vs. Future Orientation
Managerial Accounting: Is concerned with more of a forward-looking data, that will give projections, forecast, and what-if analyses for predicting the outcome in the future. It emphasizes planning for the future and budgeting as well as taking strategic decisions.
Financial Accounting: More of a historical one which is concerned with the recording and analysis of past financial transactions. It represents what has happened in a particular reporting period, summarizing it in financial statements.
Regulatory Compliance
Managerial Accounting: There are no strict regulations or standards. Because the reports are for internal use, the format, structure, and content may be tailored to the purpose and goals of managerial accounting, which is utility and relevance in contrast to regulatory compliance.
Financial Accounting: This portion is subject to external standards – GAAP for U.S. or IFRS for international applications. The process is governed to make financial reports transparent, comparable, and reliable for stakeholder needs.
Degree of Detail
Managerial Accounting: It provides very detailed information, and it may focus on particular areas or departments within an organization. The reports have often included detailed cost breakdowns, performance analyses, and other in-depth metrics.
Financial Accounting: Summarizes data into high-level financial statements. Financial accounting condenses financial transactions into a more general view of the company’s performance, focusing on the overall financial health rather than specific departments or operations.
Examples of Managerial and Financial Accounting
Examples of Managerial Accounting
Budgeting and Forecasting: A manufacturing company can prepare a monthly budget with the estimates of raw materials, labor, and overhead. The budget helps the organization prepare for future expenses and manage cash flow.
Cost Analysis: For a retailer, an analysis of shipping, packaging, and labor cost will be required in order to determine whether it is beneficial to outsource shipping or handle it in-house. Managerial accounting provides the cost-benefit analysis for this decision.
Break-even analysis: a small business will break down its product to calculate how many units it has to sell before it recovers the fixed and variable costs; management can, based on the break-even analysis, see where changes in price or costs will hurt profitability.
Variance analysis: after a budget, managerial accountants in a firm will try to determine reasons for variations between actual and budgeted figures; for instance, if labor costs were more than budgeted.
Examples of Financial Accounting
Income Statement. A high-technology firm has to produce an income statement at the end of every quarter, which reflects revenue, expense, and net income. The outcome is measured by shareholders to consider profitability as well as investments.
Balance Sheet A financial institution should have a balance sheet, which states its assets, liabilities, and shareholders’ equity. This statement gives insight to investors about the solvency or the financial position of the company at a particular point in time.
Cash Flow Statement A provider of healthcare generates a cash flow statement to report the inflows and outflows of cash realized in its operations, investments, and financing activities. Mostly, it is checked for its credit worthiness.
Annual Report: Any business firm which is also listed on the stock exchange prepares an annual report containing all the financial statement and other details about its operations, strategy, and prevalent market conditions. This report helps users to take informed decisions based on the company’s comprehensive financial performance.
Conclusion
Managerial and financial accounting both perform vital roles, and they cater to different needs at an organization. Managerial accounting helps in the internal decision-making and smooth functioning of the firm by focusing on the future and specific aspects of the operations of the company. Financial accounting provides standardized information to the outside world so that it may understand the financial position and performance of the firm. The two accounting practices allow for catering to both the internal and external needs, providing a complete view of an organization’s financial health and strategic outlook.