Question

1) How does managerial accounting differ from financial accounting? Please refer to the following elements:

• Internal versus External

• Objective/Verifiable versus Relevant

• Type of report (Summary versus Detailed)

Answer 1

The formal set of accounting required to be prepared to serve the purpose of both internal stakeholders (employee, management, board of directors, etc) and external stakeholders (Tax authorities, Suppliers, lenders, banks, etc) is FA. It has to be followed as per the accounting principles and guidelines.

The informal set of accounting required to be prepared for internal purpose only is MA, like serving for the management of the organization. Examples: sales budget, process costing, etc. There is no guideline or principle for preparing this kind of accounts.

Similarity: There are only two similarities.

1. Both these are branches of accounting.

2. Both these are prepared to serve the purpose of stakeholders. Although the financial accounting is mainly required for external parties and managerial accounting is for management.

Dissimilarity:

1. Financial accounting must be prepared in each period; therefore, it becomes statutory. Managerial accounting is need oriented; therefore, there is no compulsion.

2. Financial accounting is historical based; therefore, it shows the results of past. Managerial accounting although take the results of past but it gives estimations of future.

Internal Vs. external:

Financial accounting is prepared for both internal and external purpose.

Managerial accounting is prepared only for internal purpose.

Objectives:

Financial accounting is verifiable, since all figures and facts within it are proven.

Managerial accounting is relevant, since facts and figures of it may not be proved but very much effective in the present situation. It gives guidance for future.

Reports:

Financial accounting gives reports on detailed basis, because it covers the whole business.

Managerial accounting gives report on summary basis, because it covers only the operational activities of a business.