Financial and management accounting are the two branches of a system that help companies produce statements and records for all business events and transactions.
Financial accounting helps generate precise financial records, whereas managerial accounting helps manage quantitative/qualitative information for profit maximization.
What is Financial Accounting?
Financial accounting is a procedure used for creating financial statements for external parties like lenders, suppliers, customers, creditors, and shareholders. The procedure is best for maintaining and managing financial records.
Financial accounting also produces statements for a specific period, like a year or more, that comparing profits and performance is easy. These financial statements usually comprise cash flows, balance sheets, and income statements.
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What is Management Accounting?
Management accounting is also known as cost accounting or managerial accounting. Management or managerial accounting is the process of measuring and analyzing financial information.
It is performed for effective decision-making, strategizing, and planning. Also, it helps with accurate forecasting and managing of daily business operations.
Managerial accounting further covers both monetary and non-monetary aspects for both budgeting and setting business goals. Unlike financial accounting, management accounting is for internal company stakeholders only and does not require publishing or auditing.
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Financial Accounting vs Management Accounting: A Quick Glance
|Metrics||Financial Accounting||Managerial Accounting|
|Purpose||For external communication of financial health.||Internally for decision making.|
|Guidelines to Follow||IAS, IFRS and GAAP||Not Any|
|Review Done By||Auditors & Regulators||Not Applicable|
|Focus Data||Financial Data||Financial & Operational Data|
|Approach||Analysing historical performance||Finding the way ahead|
|Scope & Requirement||Mandatory for entire company’s financial health check||Can perform it on demand for any product or segment|
|Performed at What Duration||For a specific period like a quarter||Performed on an ongoing basis|
Key Differences Between Financial Accounting and Managerial Accounting
Financial accounting is used to collect accounting data for preparing financial statements. Whereas managerial accounting is focused on analysing the financial data for decision making. Here are some other differences between the two:
- Asset valuation
Financial accounting helps with the valuation of assets & liabilities. Managerial accounting deals only with the productivity of items like assets/valuation and not their revaluation.
- Operational focus
The focus of financial accounting is on the profitability margins of a business. Managerial accounting, on the other, aims at identifying bottlenecks and how to fix them.
- Aggregation level
Financial accounting looks at the outcome achieved by the entire business. Managerial accounting helps analyze data related to geographic regions, customers, product lines, and profits for better business performance.
- Pay level
Pay level is usually higher in financial accounting as the field requires greater expertise and training. Compared to financial accounting, the pay level isn’t that high in managerial accounting.
- Course certification
Those specializing in financial accounting receive Certified Public Accountant’s designation, whereas managerial accountants receive Certified Management Accountant designation.
- Timing of reports
Financial accounting produces reports at the end of a specified period. Managerial accounting doesn’t follow a fixed accounting period. Reports under managerial accounting are produced quite frequently.
Financial accounting has more to do with the positive results achieved so far. Managerial accounting is concerned with budgetary forecasts and such upcoming requirements.
- Accounting standards
Financial accounting operations are based on specified accounting standards. Managerial accounting doesn’t function based on such established standards.
- Distribution of statements
Financial accounting creates and distributes financial statements both outside and within the company. Managerial accounting deals with operational reports that are meant to be only for company insiders.
- Records & facts
Financial accounting makes it a point to maintain the records well, whereas managerial accounting concerns itself only with verifiable facts.
Similarities Between Financial Accounting and Managerial Accounting
Both financial and managerial accounting have the end goal of achieving financial sustenance. None of these processes are performed in isolation and have certain similarities.
The similarities between financial accounting and managerial accounting methods for analyzing a business’s performance are:
- Both the procedures are a part of complete accounting and financial information system.
- Both systems look after the economic events quantified in terms of rupees.
- The key focus area of both these procedures are assets, expenses, revenues, and financial statements.
- Both measure the costs of doing a business in a specified period.
- The accounting concepts and principles used are the same.
Financial and managerial accounting methods are critical for managing the cash flows, profitability, expenses, and business records. Make use of these methods to formulate accurate plans and business forecasts.