What is difference between financial accounting and management accounting?

Financial accounting and managerial accounting (sometimes called management accounting) are quite different. While both these types of accounting deal with numbers, managerial accounting is strictly for internal use. Financial accounting, on the other hand, focuses primarily on the collection of accounting information to create financial statements.

A financial accounting system is aimed at external decision-makers such as investors, regulators, and creditors, while a managerial accounting system is aimed at internal decision-makers such as managers.

What’s the Difference Between Financial and Managerial Accounting?

  Financial Accounting Managerial AccountingReporting FocusCreating financial statements to be shared with both external and internal stakeholdersOperational reporting to be shared within the companyFrequencyDue at the end of an accounting periodIssued more frequently and as needed by managementStandardsNeed to follow various accounting standardsNo set of standardsPeriodLooks at the past by examining financial informationLooks to the future using forecasting

Reporting and Frequency

Financial accounting focuses on statements based on financial information, to be shared with both internal and external shareholders. These financial statements are due at the end of an accounting period, typically once a year, although they may be compiled more frequently.

Managerial accounting focuses on operational reporting and looks to the future by using forecasting. These reports are shared internally within the company, typically with managers and senior employees. Managerial accounting reports are issued more frequently and follow no specific period.

Note

Statements created with financial accounting are completely historical and based on a defined time period. Managerial accounting creates business forecasts and is used to make business decisions.

Types of Financial ReportsTypes of Managerial ReportsIncome statementSales reportsBalance statementInventory reportsCash flow statementDepartmental reports

Accounting Standards

One of the biggest differences between financial and managerial accounting is their legal status. As the reports created with managerial consulting are purely for internal use, there is no specific set of accounting standards they need to adhere to. Each company is free to use its own system and rules when creating managerial reports.

On the other hand, financial accounting reports are tightly regulated, especially when it comes to a company’s balance sheet, income statement, and cash flow statement. The information contained in these statements is available for public review and used by investors, which is why companies need to be very careful about how they report figures and make calculations for these.

In the U.S., the financial accounting reports of a company are governed by the Generally Accepted Accounting Principles (GAAP) as adopted by the U.S. Securities and Exchange Commission (SEC). Conforming to these rules allows lenders and investors to directly compare companies based on their financial statements.

Note

Managerial accounting statements can be drawn up by  Certified Management Accountants (CMAs), while financial accounts are drawn up by Certified Public Accountants (CPAs).

Which Is Right for You?

Choosing between financial accounting and managerial accounting should not be difficult, and the choice mainly depends on your company’s specific needs and business model.

When Financial Accounting Works Best

Financial accounting reports are typically generalized and concise, and information is less revealing because they are available to outside parties. Most companies will require financial statements regularly.

Choose financial accounting if you:

• Want to make reports available externally
• Want to look at the company’s historical performance
• Want to only look at financial data
• Want to provide information accepted by outside regulators

When Managerial Accounting Works Best

Managerial accounting reports tend to be more detailed and technical in nature. Companies are often looking for ways to gain a competitive advantage, so they examine a lot of information that might be hard to understand for outside parties.

An example would be an internet company that uses cloud computing services for its employees. The monthly rates for renting out cloud space have increased, so a managerial accounting report can detail the company’s budget for cloud services against its actual expenses to see if the increases in cloud services are costing the company too much.

Choose managerial accounting if you:

• Want to make reports available internally
• Want to do forecasting
• Want to look at financial and operational data
• Want to focus on specific management needs

Note

Managerial accounting is used by managers to better understand and run the company, while financial accounting is used by third parties to evaluate a company’s compliance standards as set out by regulators such as the Financial Accounting Standards Board (FASB).

Although it’s entirely possible for a company to only use financial accounting, employing it along with managerial accounting can offer a best-of-both-worlds option: accurate financial information and a clear path to planning for a better future.

The Bottom Line

The key difference between financial accounting and managerial accounting lies in the intended users of information for each. Financial accounting provides financial data to third parties outside of the company, while managerial accounting provides important information that allows managers within the organization to make informed business decisions.

Financial accounting must follow certain standards in accordance with GAAP, which is a requirement for businesses based in the U.S. to maintain their publicly traded statuses. Managerial accounting is not intended for external users and can be modified according to the company’s processes.

Frequently Asked Questions (FAQs)

Which should be taken first, financial accounting or managerial accounting?

To pursue a career in business leadership, it is recommended to take managerial accounting after financial accounting. Financial accountants have a solid knowledge base and skill set in accounting with a good understanding of debit, credit, and financial reporting, which is helpful when preparing managerial financial reports.

Which is harder, financial accounting or managerial accounting?

Managerial or management accounting is considered to be easier, as it requires fewer journal entries and mostly involves budgeting and forecasting. It is used for internal purposes only and doesn’t require financial statements that conform to specific accounting standards. 

Are personal finances considered financial accounting or managerial accounting?

Personal finances are closer to financial accounting rather than managerial accounting. This is because your personal finances often involve the preparation of financial statements to show income and expenses, and tracking your net worth. You may also need to monitor bank statements, investments, and more, requiring similar steps to preparing financial statements for a business.

Why is accounting important?

Accounting plays a very important role in running a business, as it ensures statutory compliance, helps you keep track of income and expenses, and provides managers and investors with financial data that can be used to make important business decisions.

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