What are the similarities and differences of financial accounting and managerial accounting?

Management accounting is a field of accounting that analyzes and provides cost information to the internal management for the purposes of planning, controlling and decision making.

Management accounting refers to accounting information developed for managers within an organization. CIMA (Chartered Institute of Management Accountants) defines Management accounting as “Management Accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of information that used by management to plan, evaluate, and control within an entity and to assure appropriate use of an accountability for its resources”. This is the phase of accounting concerned with providing information to managers for use in planning and controlling operations and in decision making.

Managerial accounting is concerned with providing information to managers i.e. people inside an organization who direct and control its operations. In contrast, financial accounting is concerned with providing information to stockholders, creditors, and others who are outside an organization. Managerial accounting provides the essential data with which organizations are actually run. Financial accounting provides the scorecard by which a company’s past performance is judged.

Because it is manager oriented, any study of managerial accounting must be preceded by some understanding of what managers do, the information managers need, and the general business environment.

Comparison chart

	Financial Accounting	Management Accounting
Objectives	The main objectives of financial accounting are to disclose the end results of the business, and the financial condition of the business on a particular date.	The main objective of managerial accounting is to help management by providing information that is used to plan, set goals and evaluate these goals.
Audience	Financial accounting produces information that is used by external parties, such as shareholders and lenders.	Managerial accounting produces information that is used within an organization, by managers and employees.
Optional?	It is legally required to prepare financial accounting reports and share them with investors.	Managerial accounting reports are not legally required.
Segment reporting	Pertains to the entire organization. Certain figures may be broken out for materially significant business units.	Pertains to individual departments in addition to the entire organization.
Focus	Financial accounting focuses on history; reports on the prior quarter or year.	Managerial accounting focuses on the present and forecasts for the future.
Format	Financial accounts are reported in a specific format, so that different organizations can be easily compared.	Format is informal and is on a per department/company basis as needed.
Rules	Rules in financial accounting are prescribed by standards such as GAAP or IFRS. There are legal requirements for companies to follow financial accounting standards.	Managerial accounting reports are only used internally within the organization; so they are not subject to the legal requirements that financial accounts are.
Reporting frequency and duration	Defined - annually, semi-annually, quarterly, yearly.	As needed - daily, weekly, monthly.
Information	Monetary, verifiable information.	Monetary and company goal driven information.

Video Explaining the Differences

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Most accounting tasks can be divided into financial accounting and managerial accounting. It is useful to describe the differences between these two aspects of accounting, since each one describes 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 are noted below.

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. Financial accounting reports are more likely to be distributed to outsiders, while the results of managerial accounting are more likely to only be used by insiders.

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. Managerial accounting reports are more likely to be of use in improving operations, while financial accounting reports are used by outsiders to decide whether to invest in or lend to a business.

Proven Information

Financial accounting requires that records be kept with considerable precision, which is needed to prove that the financial statements are correct. Outside auditors rely on this information when auditing a firm’s financial statements. Conversely, 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.

Certifications

There is also a difference in the accounting certifications typically found in each of these areas. People with the Certified Public Accountant designation have been trained in financial accounting, while those with the Certified Management Accountant designation have been trained in managerial accounting.

Pay Levels

Pay levels tend to be higher in the area of financial accounting and somewhat lower for managerial accounting, perhaps because there is a perception that more training is required to be fully conversant in financial accounting.

What are the similarities and differences of financial and managerial accounting?

What are the similarities between managerial accounting and financial accounting?

What are the differences between financial accounting and management accounting?

What is the difference between financial and managerial accounting give examples?