Question

Do the differences between financial and managerial accounting disturb you? Does there seem to be more precision and more constraint around one over the other? Why do you think that is, and why is it important?

Answer 1

A common question is to explain the differences between financial accounting and managerial accounting, since each one involves a distinctly different career path. In general, financial accounting refers to the aggregation of accounting information into financial statements, while managerial accounting refers to the internal processes used to account for business transactions. There are a number of differences between financial and managerial accounting, which fall into the following categories:

Aggregation. Financial accounting reports on the results of an entire business. Managerial accounting almost always reports at a more detailed level, such as profits by product, product line, customer, and geographic region.

Efficiency. Financial accounting reports on the profitability (and therefore the efficiency) of a business, whereas managerial accounting reports on specifically what is causing problems and how to fix them.

Proven information. Financial accounting requires that records be kept with considerable precision, which is needed to prove that the financial statements are correct. Managerial accounting frequently deals with estimates, rather than proven and verifiable facts.

Reporting focus. Financial accounting is oriented toward the creation of financial statements, which are distributed both within and outside of a company. Managerial accounting is more concerned with operational reports, which are only distributed within a company.

Standards. Financial accounting must comply with various accounting standards, whereas managerial accounting does not have to comply with any standards when information is compiled for internal consumption.

Systems. Financial accounting pays no attention to the overall system that a company has for generating a profit, only its outcome. Conversely, managerial accounting is interested in the location of bottleneck operations, and the various ways to enhance profits by resolving bottleneck issues.

Time period. Financial accounting is concerned with the financial results that a business has already achieved, so it has a historical orientation. Managerial accounting may address budgets and forecasts, and so can have a future orientation.

Timing. Financial accounting requires that financial statements be issued following the end of an accounting period. Managerial accounting may issue reports much more frequently, since the information it provides is of most relevance if managers can see it right away.

Valuation. Financial accounting addresses the proper valuation of assets and liabilities, and so is involved with impairments, revaluations, and so forth. Managerial accounting is not concerned with the value of these items, only their productivity.

In Conclusion we can say that:

Financial accounting deals with a history of previous periods, as well as the processing of data in the current period. The accounting cycle is crucial to financial accounting standards and processes, ensuring that data is compiled and reported in a consistent way, so that anyone who's familiar with accounting's general practices can understand. Financial accounting includes no future projections or predictions.

Although financial accounting reports may be useful for future use such as forecasting, the forward view is more definitive of managerial accounting. Once again, the company that has the most accurate "crystal ball" on future market activity has the advantage, underscoring the importance of effective managerial accounting, as well as its potential weaknesses. A company that closely ties itself to inaccurate managerial accounting projections may experience challenges adapting to actual market conditions