financial accounting and managerial accounting

Difference Between Financial Accounting and Managerial Accounting

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Financial accounting and managerial accounting are two fundamental branches of accounting that are essential for managing and maintaining the financial records of a business. Although they may seem similar, they serve different purposes and are used by different stakeholders to make informed business decisions. In this article, we will explore the differences between financial accounting and managerial accounting, and their significance in the world of business.

Difference Between Financial Accounting and Managerial Accounting

Financial accounting and managerial accounting are two of the largest branches of the accounting field.

According to Investopedia, the biggest practical difference between financial accounting and managerial accounting relates to their legal status. Reports generated through managerial accounting are only circulated internally, and each company is free to create its own system and rules on managerial reports. This means there is no regulation or uniformity in managerial accounting reports. The intended purpose of managerial accounting is to assist users internal to the company in making well-informed business decisions. On the other hand, financial accounting is aimed at providing information to external users, such as investors, creditors, and regulators, to make decisions about the company.

Sharma (2022) explains that financial accounting involves collecting data to create financial statements, while managerial accounting refers to the company’s internal processes used to account for business transactions. OnlineDegrees.und.edu notes that managerial accounting focuses on an organization’s internal financial processes, while financial accounting focuses on an organization’s external financial processes. Managerial accountants focus on short-term growth strategies relating to economic maintenance.

Also,  Freshbooks (2023) highlights that financial accounting looks at the entire business while managerial accounting reports at a more detailed level. Managerial accounting focuses on detailed reports that can be used to improve operations, while financial accounting reports on the profitability of a business.

AccountingTools notes that financial accounting requires that accounting information be reported at regular intervals, while managerial accounting may address budgets and forecasts, and so can have a future orientation

Some Examples of Financial Accounting and Managerial Accounting Reports

Financial accounting reports are used to provide information to external users, such as investors, creditors, and regulators. According to AccountingCoach, examples of financial reporting include financial statements, such as the income statement, balance sheet, and statement of cash flows. WallStreetMojo.com explains that accounting reports are prepared for a specific purpose, such as checking the ledger-wise transactions that occurred over time. These financial reports are used to analyze the financial health of a company and make informed business decisions

Managerial accounting reports, on the other hand, are used to provide information to internal users, such as managers, to make well-informed business decisions. According to IgniteSpot, managerial accounting reports compile financial information from accounting records and can include data like transactions, operational costs, product profitability, and budget variances. SmallBusiness.Chron.com highlights some types of managerial accounting reports, including budget reports, sales reports, and cost reports.
In all, managerial accounting reports are used to provide information to internal users, such as managers, to make well-informed business decisions, and examples of managerial accounting reports include budget reports, sales reports, cost reports, and internal reports such as budgets, forecasts, and variance analyses. Whereas, financial accounting reports are used to provide information to external users, such as investors, creditors, and regulators, and examples of financial reporting include financial statements, such as the income statement, balance sheet, and statement of cash flows.
Therefore, Business students should understand the differences between financial accounting and managerial accounting to make informed business decisions.

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In conclusion, financial accounting and managerial accounting are vital elements of contemporary enterprises, and it is crucial for business students, business owners, managers, and accountants alike to comprehend their distinctions. Managerial accounting is more focused on giving internal stakeholders the information they need to make educated decisions, whereas financial accounting is primarily concerned with the financial statements that are made public and used by external stakeholders. Businesses can better comprehend their financial situation, make wise decisions, and ultimately succeed by using these two styles of accounting.