Finance & Accounting

Difference Between Financial and Managerial Accounting

Financial accounting is the process of collecting data in order to create financial statements. On the other hand, managerial accounting is the internal process followed by a company to track the data. One can review the difference between these two terms to understand the concept and operability of these terms. Both these processes are essential for a business. Therefore, in this article, we have distinguished the terms- Financial service and managerial accounting.

What do you mean by Financial Accounting?

Financial accounting involves recording as well as the collection of transactions and accounting data to produce financial statements. The reports are generally generated for every accounting period. They can be generated half-yearly or annually.

The financial reports utilise the accurate and precise transaction details recorded during the accounting period to prepare the reports. The reports are important for the organisation to comply with the mandated rules and regulations. They adhere strictly to the IFRS^[1] and GAAP.

What do you mean by Managerial Accounting?

Managerial accounting includes the processes used to collect and track the financial data of a company. This form of accounting allows professionals to examine, troubleshoot and improve the company’s financial procedures.

Managerial accounting fulfils internal purposes. This is because the operational reports are usually prepared for the stakeholders’ benefit instead of serving the purposes of public consumption. Managerial accountants tend to help in strategic planning and also help executives as well as stakeholders to make informed decisions and choices.

Comparing Financial and Managerial Accounting

When we compare the two terms- financial and managerial accounting- we know that when more details are needed beyond the scope of the overall financial accounting reports, only someone from outside the organisation peruse the managerial accounting reports. However, an organisation would require accountants in these specialities for the best results.

The difference between the terms can be categorised under different heads such as audience, the timing of transactions, measurement, standards etc.

• Audience

Managerial accounting is needed for an internal audience where the general public does not read the reports or statements produced by the management accountants. On the contrary financial accounting is for internal as well as external stakeholders. An organisation’s executive teams, regulators and creditors depend upon the financial statement.

• Report Frequency

Financial accountants provide statements at the end of the accounting period, which can be every month, quarter or other standard time frames. On the other hand, management accountants make reports at fewer standard intervals or gaps to assist stakeholders in making decisions or changing the processes.

• Timing of Transactions

Financial accounting includes transaction reports that have taken place already. This means that this type of accounting focuses only on past events. Management accounting generally includes forecasts of what may transpire after taking a different course of action, thus focusing on the future.

• Detailing Aspect

Managerial accounting involves reporting on the detailed aspects of the organisation. For instance, management accountants may produce reports on the profits accrued from different product lines or customer types to assist executives with strategic planning. On the contrary, financial accounting includes the entire organisation without such detailed reports.

• Measurement

Financial accounting is crucial to confirm the actual value of the organisation. This includes its assets and liabilities. On the other hand, managerial accounting is crucial for understanding the impact these aspects have on the productivity and profits of the organisation.

• Standards

As managerial accounting is made for internal purposes, it does not have to comply with specific industry standards rather, the organisations can establish their own reporting rules.

Financial accounting is for internal and external purposes, so it must abide by the accepted standards. Financial accountants follow the financial accounting standard boards’ generally accepted accounting principles and the standards laid down by the International Financial Reporting Standards Foundation.

For easy reference, we have highlighted the difference between these two terms (Financial and Managerial Accounting) in the table made below-

Financial Accounting	Managerial Accounting
Public stakeholders consume the reports under this head	The information under this head is only for internal purposes
Financial accounting focuses on providing information on those outside the organisation	It is focused on providing information to people inside the organisation
This form of accounting is heavily utilised by public regulators, creditors & shareholders	The information under this is confidential and mainly utilised by managers only within the company.
The nature of Financial accountancy data and analysis reports is historical.	The information under this is heavily forward-looking.
The reports under this category and other material are case-based	The information under this is based upon model and abstract, aiding decision-making.
Information under financial accounting calculation follows the generally accepted financial accounting norms & standards.	Information for the computation of managerial accounting is guided by the managerial requirements identified within a particular company.
Financial accounting is of encompassing nature, focusing on the overall organisation.	On the contrary, Managerial accounting is more specific- offering detailed & divided information on different aspectslike tasks,operations, specific activities, departments, products, and sales.
The financial accounting reports are derived post a particular period of time like the fiscal year or quarter for those outside the company.	Whereas managerial accounting reports can be given to cover any specific period, such as a day, a week or a month.
Financial accounting reports are termed as predictively valuable & historically factual. This helps those wishing to invest or get associated with the organisation to make improved & informed financial decisions.	This form of accounting deals with confidential material and particularly for the company’s top management to make important decisions.
Reports in the financial accounting pertain to the overall results of the business.	Reports in Managerial accounting are generally detailed as well as poignant. It may be for a geographic area, product,customer, service etc.
In general Financial accounting looks at reports,essentially to show the profitability as well as the efficiency of the company.	WhereasManagerial accounting provides reports on areas of concern and their remedy to the business.

Financial and Managerial Accounting: Tools and Components

• Managerial Accounting

In the case of managerial accounting, the data from the financial statements are used by the management, which helps in assessing the financial well-being of the company. Some standard methods used for the same include ratio analysis, comparative statements, and trend analysis.

The management can carry out an analysis for managerial decision-making based on the data of the company’s cost records. Few of the methods used include marginal costing, cost volume profit analysis, standard costing, and absorption vs variable costing, among others.

Based on past information, methods such as budgeting can be used by the management for the process of decision-making.

• Financial Accounting

The financial statements provide a picture of the statement of the cash flows to know the company’s total net cash inflow and outflow. The income statement that provides the net income generated or the net loss incurred is a part of the financial statements.

A balance sheet or the statement of the financial position is a crucial component of financial accounting. It is prepared by the end of the financial year. It plays a crucial role in understanding the company’s financial strength.

Conclusion

To conclude, it can be summarised that the significant difference between Financial and Managerial Accounting relates to the objectives of both these terms. Financial accounting seeks to provide information to the parties outside the organisation, but managerial accounting information looks to assist managers in an organisation make informed decisions.

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