Financial And Managerial Accounting: Whats The Difference

Financial and Managerial Accounting: What's The Difference?

Whether it is a sole proprietorship, partnership, corporation, or a limited liability company, all businesses survive on the buying/selling of goods and services for cash or credit. They may buy land and build office complexes, stores, or factories. They may buy supplies, equipment, merchandise to sell, and/or the raw materials required to manufacture goods. They hire employees, pay salaries and benefits. All of these "business" activities need to be measured, analyzed, and recorded. Accounting is the set of procedures used to analyze, measure and record said activities. For this reason, accounting is often referred to as the "language of business". Within the accounting realm, there are two main types: financial accounting and managerial accounting.

Financial accounting generally abides by the GAAP to record the activities of a business and to report the results of a business's operations. Every transaction that occurs, both big and small, are recorded as an entry in a journal, and each type of activity is given an account in a general ledger (i.e. account payables and account receivables). Journal entries are then sorted by posting them in the appropriate general ledger account. This information (i.e. balances) in the general ledger accounts are what financial accountants use to prepare financial statements such as the income statement and balance sheet.

There are numerous individuals, both inside and outside, the business that use these financial documents:

* Managers use the information to establish how well the business is performing, to

determine what the business is worth, and to make decisions.

* Financial institutions examine financial statements to discover a businesses debts and profitability when deciding whether to approve a loan to the company.

* Investors may analyze financial statements to determine whether they would, or would not, be a sound investment.

* Regulatory agencies, such as the SEC, may examine this data to confirm compliancy to required rules and regulations.

* The businesses competitors may compare/contrast the financial information to their own to see how they are fairing, and/or use the information to gain a competitive advantage (What is Managerial Accounting, Chapter 1).

The focus of managerial accounting is on the decisions made by the management of a business. Managerial accounting organizes accounting information to help plan and operate a business. There are two major differences between financial accounting and managerial accounting.

First, managerial accounting is concerned primarily with decisions made within the business. Therefore, people outside the business are not the intended audience for managerial information. Managerial accounting information is thus used by those individuals within the organization to make business decisions.

Second, managerial accounting is not required to follow any set guidelines/principles such as the GAAP. Instead, managerial accounting concentrates its efforts on providing the needed information by its management staff so that they may make better business decisions. This type of information varies depending on the particular decision to be made. The following is a non-inclusive list which demonstrates the types of decisions made with consideration to the provided information from managerial accountants:

* Setting prices

* Determining the cost of manufacturing an item

* Granting credit to customers

* Managing inventory on hand

* Leasing versus buying new equipment

* Financing an investment

* Projecting revenues and costs

* Setting business goals

Within the managerial accounting realm there are four subgroups of accounting management. Planning & Forecasting deals primarily with organizational and/or departmental budgets. Cost Accounting deals with the costs of manufacturing. Tax Accounting considers the effects of tax rules and regulations on management decisions, and Internal Auditing, which examines the accounting procedures and processes of a business for consistency and compliancy (What is Managerial Accounting, Chapter 1).

While financial and managerial accounting are both forms of accounting, it is obvious that their focus is significantly different. Please refer to the table below for a summation of these differences:

Attribute Managerial Accounting Financial Accounting

Primary users of the information Managers; there are few constraints on the internal information accessible to them. External investors and creditors; they have no access to the internal records of corporations.

Accounting standards No universally accepted set; there is no constraint on the format or content of internal reports Generally accepted accounting principles--a complex set of measurement and reporting standards used by publicly reported firms.

Variety of reports Very large variety; reports vary by purpose (budgets, decision support, variance analyses, cost-volume-profit analyses, departmental performance reports, product costing reports, and many others). Primary reports are the financial statements and footnotes. The income statement, balance sheet and statement of cash flows are required reports.

Type of information reported Financial and non-monetary information is prevalent in reports. Measurement of non-financial variables is increasingly important. Quality measures and statistical control of production processes are examples. Although cost information is important, reports are not limited to cost measurements. Primarily financial, in dollar terms. The financial statements and footnotes are mainly concerned with reporting financial performance and position. Some non-financial information may accompany the financial statements in the footnotes, schedules, Management's Discussion and Analysis and other narrative portions of the annual report.

Focus of reports, level of data aggregation Reports tend to be more narrowly focused, at lower levels of aggregation so that data reflects controllable variables. Reports are highly aggregate. It is not unusual for the income statements of multibillion dollar firms to have 15 line items or