Accounting is an essential tool for any business. However, one must differentiate between financial and managerial accounting because they provide different types of information and serve different objectives. Below are the 5 ways that show how different they are.
What is the difference between financial accounting and managerial accounting?
External stakeholders, such as stockholders, lenders, financial analysts, and others from outside the company, are normally the ones who make use of the financial statements produced by financial accounting.
On the other hand, management accounting reports provide data that can be used by internal decision-makers such as the managers of the company.
The purpose of creating financial statements is to provide external stakeholders with an accurate report on the financial health of the company. For example, these statements are essential for lenders to determine the credit-worthiness of the organization. Potential investors also want to see the profitability of the company before they invest. Further, these financial statements are also required to be submitted to government agencies such as the Securities and Exchange Commission.
The managers of the company need data that they can use in order to make decisions regarding the day-to-day operations of the business and this is where management accounting reports are beneficial. Budgets and costing, for example, help managers determine how a specific department is performing and if they are contributing to the achievement of the company’s overall goals. They also help management identify possible areas for improvement.
Financial reports present data on the company’s financial health and performance over a specific period of time. The most common financial accounting reports include the Balance Sheet (which lists the company’s assets and liabilities), Income Statement (which details the company’s revenues and expenses) and Statement of Cash Flow (which shows how cash and cash equivalents are affected by changes in the balance sheet and income statement).
While financial reports require exact numbers, management accounting reports do not. Instead of just using data regarding past performance, they are also based on current trends and forward-looking forecasts. The typical management accounting reports include Sales and Revenue Forecasts and Budget Forecasts.
Management accounting is based on business needs and is more flexible in that it does not need to follow any specific structure. On the other hand, financial accounting is more rigid and must adhere to the Generally Accepted Accounting Principles (GAAP).
Management accounting reports are usually prepared on a weekly or monthly basis by managers or business analysts. Financial accounting reports are filed annually. The annual reports must also be made part of the public record for publically traded companies.
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