Financial accounting and managerial accounting are two of the four largest

branches of the accounting discipline (e.g. tax accounting and auditing are

others). Despite many similarities in approach and usage, there are
significant differences between the financial and managerial accounting.
These differences primarily center around compliance, accounting
standards, and target audiences.

KEY TAKEAWAYS

 Managerial accounting is the practice of identifying, measuring,

analyzing, interpreting, and communicating financial information to
managers for the pursuit of an organization's goals.
 Financial accounting involves recording, summarizing, and reporting
the stream of transactions and economic activity resulting from
business operations over a period of time to the public or regulators.
 Managerial accounting differs from financial accounting because the
intended purpose of managerial accounting is to assist users internal
to the company in making well-informed business decisions.
Main Objectives of Both Accounting Practices
The main objective of managerial accounting is to produce useful
information for a company's internal use. Business managers collect
information that encourages strategic planning, helps them set realistic
goals, and encourages an efficient directing of company resources.

Financial accounting has some internal uses as well, but it is much more

concerned with informing those outside of a company. The final accounts
or financial statements produced through financial accounting are designed
to disclose the firm's business performance and financial health. If
managerial accounting is created for a company's management, financial
accounting is created for its investors, creditors, and industry regulators.

Past and Present Use

The information created through financial accounting is entirely historical;
financial statements contain data for a defined period of time. Managerial
accounting looks at past performance and creates business forecasts.
Business decisions should be informed by this type of accounting.

Investors and creditors often use financial statements to create forecasts of

their own. In this way, financial accounting is not entirely backward-looking.
Nevertheless, no future forecasting is allowed in the statements.
Regulation and Uniformity
The biggest practical difference between financial accounting and
managerial accounting relates to their legal status. Reports generated
through managerial accounting are only circulated internally. Each
company is free to create its own system and rules on managerial reports.
This means there is no centralized system regulating reports, and it can
often take much longer to find what you need.

In contrast, financial accounting reports are highly regulated, especially

the income statement, balance sheet, and cash flow statement. Since this
information is released for public consumption and is highly anticipated by
investors, companies must be very careful about how they make
calculations, how figures are reported, and in what order those reports are
constructed.

The Financial Accounting Standards Board (FASB), under the aegis of

the Securities and Exchange Commission (SEC), establishes financial
accounting rules in the United States. The sum of these rules is referred to
as generally accepted accounting principles (GAAP).1

Through this uniformity, investors and lenders compare companies directly

on the basis of their financial statements. Moreover, financial statements
are released on a regular schedule, establishing consistency of external
information flows.

Reporting Details
For a variety of reasons, financial accounting reports tend to be
aggregated, concise, and generalized. Information is simultaneously more
transparent and less revealing. This is not normally the case with
managerial accounting as there are many reasons to do things a specific
way for each company. For example, you might want to internally report
lower bonuses so as to not anger mid-to-lower level employees who might
want to peruse the report.

Managerial accounting reports are highly detailed, technical, specific, and

often experimental. Firms are always looking for a competitive advantage,
so they examine a multitude of information that could seem pedantic or
confusing to outside parties.

The Bottom Line

The key difference between managerial accounting and financial
accounting relates to the intended users of the information. Managerial
accounting information is aimed at helping managers within the
organization make well-informed business decisions, while financial
accounting is aimed at providing financial information to parties outside the
organization.

Financial accounting must conform to certain standards, in accordance with

GAAP as a requisite for maintaining their publicly traded status. Most other
companies in the U.S. conform to GAAP in order to meet debt covenants
often required by financial institutions offering lines of credit. Because
managerial accounting is not for external users, it can be modified to meet
the needs of its intended users. This may vary considerably by company or
even by department within a company.