the managerial accounting vs financial accounting

the managerial accounting vs financial accounting

Managerial Accounting vs Financial Accounting: A Comparative Analysis

1. Introduction to Accounting

The Internal Accounting System for Managers is designed to assist managers in dealing with the internal accounting subsystem that functions in a business entity. Managers need no special training in using internal accounting information in carrying out their management responsibility. Therefore, a background understanding of the internal accounting system assists business managers in using, rather than just benefiting from, the information provided through the internal accounting practices and reports. Accounting provides the modes and tools by which the internal accounting system’s capabilities and limitations can be exploited, as well as exercised and expanded.

The world of business is a complex universe full of unique and seemingly disparate concepts. These numerous concepts are all strategies used to make businesses of the world successful. All these businesses are conducted in a framework of rules and directions, which define the terms and concepts used in accounting. These are the bases of communication between managers and users of internal accounting or financial statements. The discipline that studies this terminology and the bases of this communication is called accounting. One of its main properties here is the choice between recording and reporting that information at different levels of aggregation: a global experience by using financial accounting, or managerially by using managerial accounting.

2. Fundamental Differences Between Managerial and Financial Accounting

A table outlines other important differences between financial accounting and managerial accounting. Essentially, managerial accounting represents an inward look, while financial accounting is an outward look. Differences typically found in practice relate to relevant standards to be used, the degree of aggregation present in reports, the level of compliance with standards, and the degree of detail present in the reports. In some settings, managers derive the dual role of financial accounting for external users (as is the case with many small firms).

Managerial accounting and financial accounting are two of the most prominent branches of the accounting discipline. The principal difference between the two involves the users and goals of the formation of reports. Managerial accounting is oriented mainly to managers’ activities, that is, internal users, and its purpose is to provide management with financial and non-financial information for the purpose of making decisions and acquiring a better understanding of the financial condition of an enterprise. On the other hand, financial accounting is concerned with financial statements prepared for external users such as stockholders, creditors, and regulatory agencies.

3. Key Concepts and Techniques in Managerial Accounting

Given the different objectives of financial and managerial accounting, it is not surprising that different competitive priorities may be reflected in financial versus managerial accounting information. Financial information must adhere to Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) and must possess certain qualitative characteristics (relevance, timeliness, verifiability, and comparability). Those standards and characteristics may inhibit the ability of financial accounting to be decision-useful to management. This is not to say that financial statements are not essential and useful in the management process. To the contrary, financial statements are crucial, but a variety of other information that is not generally provided by typical financial accounting statements is also crucial in the decision-making process. Backflush costing, for example, is a method oftentimes used to capture the cost of both direct labor and direct materials as they flow through the production process, whereas typical financial accounting captures direct labor and direct materials cost when incurred. Consequently, the total unit cost determined from the financial accounting system does not include these costs until the cycle is complete, making it impossible for accurate performance evaluation until the product is complete.

The role of managerial accounting is to provide relevant, accurate, and timely information so that management can make effective operating and planning decisions to successfully meet organizational goals. By contrast, financial accounting concerns itself with the accurate reporting of monetary consequences of past transactions to provide information necessary for making informed decisions within and outside a firm. The emphasis of managerial accounting is to help managers make decisions, whereas the emphasis of financial accounting is to report on the performance and results of the business to interested parties. Managers use tools developed from different disciplines when making decisions. For example, managers use cost function estimates developed from the field of economics, time series models using information technology, and constraint theory from linear programming.

4. Key Concepts and Techniques in Financial Accounting

All economic events that can be measured, recorded, and summarized must be classified as an asset, liability, equity, expense, revenue, or dividend. The first three of these categories represent different sources of financing. Recognition that the function of financial accounting is to facilitate judgments concerning whether the enterprise is being efficiently and effectively managed within the resource-allocation and service-ordering plan adopted leads to conclusions about the necessary characteristics of financial statements. Financial accounting is best described as the means by which financial information about an enterprise is communicated to those who have the right to receive it. Interactions with bankers or investors reflect relationships in which the use of financial information is a key dynamic of the mutual problem-solving process.

Understanding the basic concepts and techniques in financial accounting is a necessary part of learning to be a professional manager. Accounting provides much of the financial information used by managers. Without a basic understanding of financial accounting, managers will find themselves ill-prepared for a world in which the capability to interpret accounting information becomes increasingly important. Even people who rely on other professionals to create the numbers are frequently called on to analyze and interpret the implications of financial accounting numbers. Although financial accounting and the techniques used in finance and economics differ markedly from each other, success in an organizational unit may encourage further assignments in fields that rely heavily on financial information, leading, in turn, to an increased demand for individuals with such skills.

5. Applications and Importance of Managerial and Financial Accounting in Decision-Making

This emphasis on financial measures leads to a decrease in economic efficiency and can catch companies off guard when new entrants emerge with a better product that has already been developed by established companies. It would rather be counterproductive and lead to the company’s downfall. Although attaining short-term financial performance might be necessary for the organization’s survival, it is not sufficient for its well-being. There are four steps to a sound managerial accounting, particularly for manufacturing organizations, and “the treadmill of production” is one of the main reasons an organization encounters numerous problems with its existing cost system. Without daily reporting of evaluation and cost data, the viability of the production processes is placed at risk, resulting in compromised part sizes, out-of-tolerance dimensions, inadequate performance levels, and high parts scrap rates.

Managerial accounting is concerned with providing information to an organization’s managers and other employees so that they can make better business decisions and be better equipped in their planning, implementing, and evaluating of business activities. Some advantages of managerial accounting systems are: better information for trade-off decisions, better information for performance appraisal, product development, and strategic choice, better incentives for goal-congruent behavior, reduced focus on short-term financial performance, and other merits. It is unfortunate that in today’s business environment, financial performance is greatly emphasized, often at the expense of the performance indices that lead to better financial measures over the longer term. The parameters other than purely financial parameters that are not summarized in the financial accounting reports are overshadowed.