Question

Describe the main differences between financial accounting and managerial accounting, and the differences between accrual and cash accounting.

Answer 1

Difference between accrual and cash accounting

1) The main difference between accrual and cash accounting is the time at which it is recorded.

2) In cash accounting, the recording of income and expenses is done on payment and receipt of cash which is immediate.

3) In accrual, it is anticipated revenue and expenses which are recorded. Anticipated revenue and expenses means which are going to incur later but which belongs to current period.

4) Matching concept is followed in accrual, where income of one period are matched with expenses of same period. Despite not being paid, the expenses are recorded. While in cash accounting, on payment it is recorded and not focused on period for which it involves.

5) Cash accounting is accurate while accrual accounting portrays correct picture of accounts payable and accounts receivable.

6) The accrual method smoothes the income as it records in period to which it is related. Cash accounting is suitable for small companies while accrual method is for public traded companies.

Difference between Financial accounting and managerial accounting

1) Financial accounting and Managerial accounting are two parts of accounting. Financial accounting focuses on giving true and fair view of the financial position of the company. Managerial accounting tries to provide qualitative and quantitative information to managers to maximise the profits of the company.

2) Financial accounting focuses on financial information to be given to third parties. Managerial accounting focuses of providing information to make policies, plans for managers to maximise profits.

3) Financial accounting is required to be followed compulsorily but not managerial accounting.

4) Financial accounting only provides monetary information while managerial accounting provides both monetary and non monetary information.

5) Financial accounting has specific format to report information but not for managerial accounting.

6) Financial accounting is meant for outsiders to give them view of financial position. Managerial accounting is meant for managers which is more internal.

7) Financial accounting reports are prepared at end of specified period may be monthly, quarterly, half yearly or yearly. Managerial accounting reports are prepared as per needs of management.

8) Financial accounting reports are to be audited by statutory auditors. No such requirement for managerial accounting.