On the surface, managerial accounting vs. financial accounting may not seem like it’s relevant to your business. But pop the hood, so to speak, and you’ll quickly see how the two types of accounting are different — and why both are extremely important for your business.
What Is Managerial Accounting?
At its most basic, managerial accounting provides numbers and data about the daily operations of a business. This information is compiled into various operational reports that help your business:
- Identify opportunities
- Run smoothly
- Isolate efficiency issues that impact your company’s bottom line
- Focus finance allocation
- Set corporate, business, and functional strategies
- Forecast trends in a fluctuating business environment
- Set selling prices
- Value inventory
- Determine income
One essential component of managerial accounting is budgeting. Both operational budgeting (expenses, estimated future costs, possible income) and capital budgeting (calculating whether your business’s long-term investments are worth the expense) fall into this category.
What Is Financial Accounting?
Financial accounting, on the other hand, focuses on tracking and calculating your organization’s income and expenses. This data is compiled into various reports, including:
- Income statements
- Balance sheets
- Cash-flow statements
- Stockholder equity statements
One essential component of financial accounting is tax preparation.
Differences Between Managerial Accounting vs. Financial Accounting
1) Part vs. Whole
Managerial accounting focuses on the details — the parts — of your business. Though the results of managerial accounting can be applied to the organization as a whole, they are most often concerned with finer details, such as production efficiency, customer satisfaction, and marketing success.
Financial accounting takes a wider view and examines the financial status of the entire business.
2) Problem Solving vs. Profitability
Because managerial accounting deals with the parts rather than the whole, it is much more adept at identifying financial problems and how to fix them.
Financial accounting is really only concerned with the profitability of your business. It does give you some insight into the efficiency of your business, but if there’s a problem somewhere, financial accounting won’t be able to tell you where or how to fix it.
3) Estimates vs. Facts
One of the main functions of managerial accounting is to estimate future costs, such as production, marketing, inventory, shipping, and R&D. It helps you get a handle on what might occur in a few days, weeks, months, and years.
Financial accounting only deals with facts. Because of the precision necessary to maintain financial accounts for investing and taxation purposes, this type of accounting never uses estimates.
4) Internal Reports vs. External Reports
Reports produced by managerial accounting (e.g., operational reports) are only distributed internally to individuals within your business.
Reports produced by financial accounting (e.g., financial statements and investor reports) are largely distributed (or at least available) externally to people outside your organization.
5) No Standards vs. High Standards
When compiling information and creating reports, managerial accounting doesn’t have to comply with any local, state, or federal standards. This is because the information is typically kept in-house and is not meant for public consumption.
Financial accounting, on the other hand, is strictly regulated by a vast number of basic, intermediate, and advanced accounting standards. The fact that the U.S. tax code contains more than 73,000 pages is indication enough of the high standards set on financial accounting.
6) Systems vs. Profits
Managerial accounting is interested in the systems of your business and reducing problems and streamlining operations therein. For example, managerial accounting would examine your production line, calculate costs, and estimate ways to reduce expenses.
Financial accounting disregards the individual systems and focuses instead on whether the overall business is generating profit. If a financial accounting report indicates a loss for the business as a whole, a managerial accounting report would be conducted to find and fix the problems.
7) Future vs. Past
Managerial accounting deals with budgets and forecasts and is geared more toward the future. Yes, it can provide insight into the present situation of your business, but it rarely delves into the past. That’s the realm of financial accounting.
Financial accounting takes the facts and figures that have already occurred and reports them in an easy-to-understand format. When you read a financial accounting report, you’re seeing what happened yesterday, last week, or last year (depending on how fast the report was produced).
8) No Reporting Deadline vs. Set Reporting Periods
Managerial accounting isn’t controlled by reporting deadlines, so your managerial accounting team may produce reports at any time (e.g., weekly, monthly, or whenever requested).
Financial accounting, on the other hand, must conform to set reporting periods. These periods usually occur once per quarter (every three months).
9) Asset Productivity vs. Asset Valuation
If you want to know whether an asset (e.g., an assembly machine) is productive (worth the money spent), you make use of managerial accounting to analyze the situation.
If you want to know how much that assembly machine is worth (its value) after two years in your production line, you make use of financial accounting to analyze the situation.
10) Certified Management Accountant vs. Certified Public Accountant
Each system of accounting (managerial accounting vs. financial accounting) requires a different level of training and certification.
A Certified Management Accountant (CMA) practices managerial accounting, while a Certified Public Accountant (CPA) practices financial accounting.
Get A Clear Picture With Managerial And Financial Accounting
The best way to get a clear financial picture of your business isn’t to pit the two systems against each other (managerial accounting vs. financial accounting), it’s to use them in tandem to gain insight into different parts of your business.
Think of each system as a side of your business’s financial coin. If you only ever looked at one side of that coin, your knowledge of the company would be incomplete. Ideally, your business needs both sides — managerial accounting and financial accounting — to be successful.
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