When we look at accounting, we find several broad categories or fields. Two of the most crucial ones are financial accounting and managerial accounting. Both of these areas are immensely useful for the functioning of any organization or firm.
Today it is not enough to have a generalized idea about accounting as a whole. So, read the entire article and make yourself aware of financial and managerial accounting differences.
Comparison Between Financial Accounting And Managerial Accounting
| Parameters | Financial Accounting | Managerial Accounting |
|---|---|---|
| Objective | It tracks and discloses the financial status of a firm. | It helps in giving a boost to the decision-making process. |
| Reported to | The reports are for the external as well as internal bodies. | The reports are only meant for the internal bodies of a firm. |
| Data | The data that is referred to is only financial. | It refers to both financial and non-financial data. |
| Standards | The reports must comply with GAAP. | There are no standards. |
| Format | A definite format must be followed. | There is no definite format. |
| Time and Frequency | It is conducted once in a particular period, like quarterly or annually. | It is conducted whenever the requirement emerges. |
| Auditing | These reports require auditing. | There is no need for auditing. |
Definitions Of Financial And Managerial Accounting
What Is Financial Accounting?
Financial accounting is a vital field of accounting. As the name suggests, this accounting practice is majorly associated with the finances of a firm or organization.
It is concerned with maintaining records of the firm’s financial transactions and creating financial summaries.
Financial statements involve the income statement, balance sheet, and cash flow.
What Is Managerial Accounting?
Managerial accounting is emerging as one of the significant fields of accounting. This accounting practice is responsible for the task of assessing a firm’s accounting data and interpreting it.
The objective of managerial accounting is to make the internal data of a firm accessible to the managers. In addition, it focuses on helping the firm’s decision-makers make better business decisions.
Key Differences between Financial Accounting and Managerial Accounting
Aims And Objectives
- Financial Accounting- The financial accounting exercise aims to prepare financial statements by tracking and examining a firm’s financial information.
The principal objective of financial accounting is to establish a place for the firm in terms of its finances.
It disseminates information regarding a firm’s financial performance to all the involved stakeholders.
- Managerial Accounting- Managerial accounting aims to better a firm’s decision-making process. Managerial accounting aids and improves how a firm’s decisions are made by communicating the information directly to internal entities.
People responsible for managerial accounting prepare internal reports and plans for the future. They set goals and make predictions.
Concerned Data
- Financial Accounting- The financial accounting practice only deals with the financial information of the firm or organization.
- Managerial Accounting- Managerial accounting involves not only the evaluation and interpretation of financial data but also the operational data of a firm to give a broader picture.
Concerned Entities
- Financial Accounting- It is important to note that financial accounting involves conveying information in the form of financial statements to both the internal and external parties involved.
- Managerial Accounting- The information and reports developed by managerial accountants are used internally within the firm, specifically by the managers. The information is not communicated to any external entity.
Standards Followed
- Finance Accounting- It is of utmost significance for financial accountants to comply with the Generally Accepted Accounting Principles (GAAP) while preparing financial reports.
The reason behind this requirement is that the reports developed as a result of financial accounting have to be shared with external entities.
- Managerial Accounting– There is no requirement for the reports developed by managerial accounting to follow any specific rules or regulations.
Period
- Financial Accounting- The financial accounting exercise is performed after a definite period of time. For example, quarterly or annually.
- Managerial Accounting- The managerial accounting reports are prepared more frequently whenever the need for carrying out the practice is felt.
Reports Prepared
- Financial Accounting- There is a specific format that the financial accounting reports have to follow.
- Managerial Accounting- There is no format for managerial accounting reports.
Auditing
- Financial Accounting- The financial accounts prepared are generally audited.
- Managerial Accounting- There is no need to audit the managerial accounting reports.
Frequently Asked Questions (FAQs)
1. What are the types of accounting?
Some essential accounting practices include financial, managerial, tax, forensic, and cost accounting.
2. Who uses financial accounting?
Financial accounting is necessary for any corporate firm and small business. However, it is also crucial for non-profit organizations.
3. What are the three pillars of managerial accounting?
Managerial accounting produces the information necessary for boosting the process of decision-making. Therefore, its pillars include decision-making, devising plans, and controlling.
4. Who are the users of managerial accounting?
People use the reports of managerial accounting within the firm or organization. Generally, it is the managers who find the information of great help.
5. Is financial accounting more critical than managerial?
For the better functioning of any firm, equal attention must be paid to both the accounting practices, financial accounting as well as managerial accounting.
Both have their own importance and benefit the firms in their own ways.
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