Differences between Financial and Managerial Accounting

Financial accounting
Financial accounting is focused on producing a limited set of specific prescribed financial statements in accordance with generally accepted accounting principles (GAAP). The central outputs from financial accounting are audited financial statements. These financial statements include the balance sheet and income statement which provide a scorecard by which the overall past performance of a business can be judged by outsiders. This branch of accounting targets those external stakeholders that have an interest in the reporting enterprise, but who are not involved in the day-to-day operations of the business. The reports produced by this branch are used for so many different purposes that it is often called general-purpose accounting. In addition to the financial statements, external stakeholders also have access to financial reporting via press releases that are sent directly to investors and creditors or via the open communications of the internet. The emphasis in financial accounting is on summaries of financial consequences of past activities and decisions. So, only summarized data is prepared, that covers the entire organization. The data prepared must be objective, precise and be verifiable, usually by an outside auditor. This style of reporting must follow the generally accepted accounting principles that are set by peak accounting bodies in conjunction with government agencies. The numbers used in financial accounting are historical in nature. Now whilst appearing set in stone, financial statements are actually based on estimates, judgments, and assumptions. This is why financial statements usually include notes to the accounts which are the explanations from management that help explain and interpret the numerical information. A more specialised area of financial accounting is Tax Accounting.

Managerial accounting
Managerial accounting deals with information that is not made public and is used for internal decision making only. These reports are far more detailed than financial accounting and can cover performances and activities by departments, products, customers, and employees. It is an accounting system that helps management achieve the goals and objectives of the organisation with an emphasis on the measurement, analysis, communication and the control of financial and non-financial information. This branch of accounting is primarily interested in assisting the organisations department heads, division managers, and supervisors make better decisions about the day-to-day operations of the business and in particular, those relating to the planning and control decisions . The essential data is conveyed in a wide variety of reports and is specifically targeted at those who direct and control the organisation. These reports help to promote more efficient and effective plan making, resources organizing, personnel directing, motivating and performance evaluation, and operations control. Unlike financial accounting, there are no external rules governing management accounting. The emphasis in this branch is on making decisions that affect the future with results being compared to budgets, activity-based costing, financial planning or to industry benchmarks. These reports are delivered frequently and in a timely way according to the requirements of management. Most reports are analytical in nature with a heavy emphasis on variances in the key indicators that monitor the financial performance of the business unit. A more specialised area of management accounting is Cost Accounting.

Summary of Financial vs Managerial accounting

Area Number of financial reports Rules governing the preparation of financial reports. Financial Accounting Managerial Accounting

Limited number - specifically Unlimited number - set by the needs the Balance Sheet and Income of management statement Government backed accounting standards (i.e. GAAP) No rules

Are audited financial reports Generally yes required? Financial reports are primarily prepared for ... Are financial reports made public? Financial information in reports contains ... Financial information in reports emphasizes ... Financial reports assist stakeholders with ... External stakeholders not involved in the day-to-day operations Yes

No Internal stakeholders who are involved in the day-to-day operations No Detailed performances and activities of business units, products, customers or employees.

Organisational summaries

Objectivity, preciseness and is Analytical that identify variances in verifiable key performance indicators Evaluation, assessment and investment decisions Planning, resource allocation and control decisions

Typically half-yearly and Typically daily, weekly, monthly Frequency of financial report annually according to statutory according to the needs of preparation. requirements management Financial performance is compared with ... Emphasis of financial performance. A specialized area Prior periods Pre-set budgets and industry benchmarks

Historical, being a Analytical, to in making future consequence of past activities decisions and decisions Tax accounting Cost accounting