difference between managerial and financial accounting

difference between managerial and financial accounting

Exploring the Difference Between Managerial and Financial Accounting

1. Introduction to Managerial and Financial Accounting

This implies that managers will have the ability to tailor reports to their specific needs. Also, the data that is being used is often more than purely financial; whereas, financial accounting deals almost exclusively with monetary values. The issue of who uses the information is quite different for the two fields. Financial accounting primarily focuses on the needs of people outside of the firm. Managerial accounting, in contrast, is directed towards managers within the business. As a result, managers at different levels of an organization need different kinds of information for planning, running, organizing, and controlling operations. Financial accounting information is reported at fixed intervals, quarterly and yearly, and is primarily oriented towards stockholders and creditors, since their financial claims have to be reassessed. Managerial accounting, on the other hand, is focused on the short-run and is designed for the internal decision-making needs of the firm. Since there are no firm-wide claims that have to be reassessed on a regular basis, the chief executive can tailor managerial reports to meet specific needs.

One of the reasons that accounting information is so crucial to the success of any business, whether it is a publicly or privately held enterprise, is that accounting information is used in two important ways. Managerial accounting is concerned with providing information to managers. Financial accounting provides information to people outside the firm. The most important way to distinguish the two areas of accounting is to consider the type of information and to whom the information is presented. Financial accounting provides information for people outside the firm such as stockholders and creditors, in order to help them make informed investing and lending decisions. Managerial accounting gives information to those inside the firm to help them plan, run, organize and control operations. The information supplied will be used by managers to run the firm and make important business decisions.

2. Key Differences in Objectives and Users

B) Financial Accounting Objectives Financial accounting has two main objectives. At its base, financial accounting has an external focus; its principal objectives are to report the firm’s performance and the financial condition of the entity to stockholders, potential equity investors, and creditors. Such external financial reports form the necessary backdrop for the evaluation of the firm’s intrinsic value by shareholders and potential equity investors. Similarly, creditors will base their decision regarding the extension of credit to the firm on its financial condition. Third parties can also use publicly traded firms’ financial reports for reasons distinct from equity or credit evaluation purposes.

A) Management Accounting Objectives Management accounting serves four main objectives. Through cost determination, management accounting provides the necessary data to establish and monitor production costs. Management accounting also serves the decision-making process by providing data on the financial impact of various alternatives. Management accounting serves the pursuit of profit maximization as an aide to managerial planning by comparing the costs and consequences of the various options. Third, management accounting also serves resource allocation decisions. Finally, management accounting serves the goal of coordination, which has its roots in the concepts of functional separation in the hierarchical structure of today’s large business organizations.

Management accounting has its primary focus on company managers, as the main users of financial information. In contrast, financial accounting primarily focuses on external stakeholders, most significantly shareholders, creditors, and potential equity investors who use industry financial reports to evaluate the company. There are several respects in financial and management accounting that distinguish them.

3. Contrasting Principles and Methods

In many ways, the various concepts used in managerial and financial accounting are similar in nature. But there are also important differences in how such concepts are defined and applied between the two forms of accounting. This opens the almost philosophical question of whether managerial and financial accounting are truly different in reality or whether they are simply different visions of the same accounting subject matter. After all, concepts such as the cost of a product, the profit of an entity, or the prices chosen by that entity are surely the same concepts no matter what branch of science or the arts we are referring to, managerial or financial accounting. The fact that managerial and financial accounting are conceptually and methodologically different is in part because the mandates of the two professions are different.

The section opens by noting the unique mandates of managerial and financial accounting and explores how these specialized roles have led to different audiences for the two forms of accounting, different principles, and different methods. It emphasizes the importance of understanding the specific audience for which each type of accounting is intended in framing the purposes, principles, and methods of the different accounting processes. Some potential misunderstandings and conceptual mistakes in the prior literature and their implications are discussed. These points are illustrated using some simple examples of both managerial and financial accounting concepts, such as the determination of the cost of a product and how costs change as the level of production changes. Finally, the section talks about the crucial role that data input plays in everything the accountant does.

4. Impact on Decision-Making

Information required for making managerial decisions cannot all be derived from a single source. The purpose is to help the various levels of employees in decision making. Chapter 1 concluded that there is a difference between management accounting and cost accounting and that management accounting is broader in scope than cost accounting. Its application is intended to direct the internal operations of the business in such a way that desired objectives will be achieved. It focuses at helping management in making policy, planning, control and decision-making. Its main tasks are to evaluate internal operations, to aid in overall business problems. It deals with scope of problem and providing relevant information.

Management accounting has been considered as one of the major tools that organizations can use to conduct strategic decision making. Since strategic decisions are defined as long-term decisions, thus, the timeliness of information is less relevant in making such decisions. The main problem in strategic decision making is the uncertainty that is associated with the future cash flows that will result from the decisions that have been made. Consequently, managers have to rely on information that only can be described as informed guess. This informed guess might provide the organization with a better competitive advantage than its rivals. Information derived from management accounting is particularly concerned with comparisons of actual internal financial performance relative to expected future performance.

5. Conclusion and Implications for Business Practice

For efficiency to be imputed, it is also important for firms to provide the right incentive structures and reward their staff members in a manner that supports company goals and objectives. To provide the type of incentives necessary to make such goals obtainable, the firm must evaluate performance and reward accordingly. Evaluation of a support service and a resulting reward system depend on the provision of a particular type of accounting information; different types of accounting functions evolve in order to meet this need.

This paper examines how the differences between financial and managerial accounting shape practices in these areas. We start by reviewing the comprehensive management and financial accounting literatures. Based on this review, we investigate a conceptual framework for understanding the implications of the differences between these two accounting areas. Then, we consider three major differences in service contexts: the level of aggregation, distribution form, and purpose of information. We investigate how these differences shape current managerial and financial accounting practice, offering examples throughout and description of how we have connected the two areas in our teaching materials. We explore implications and suggest critical research needs in this area. Indeed, we believe that examining accounting subsystems is greatly important as corporations provide support services for themselves at record levels and must price these services if any desired efficiency improvements are to occur.