All businesses need an accounting system to keep track of all the money coming in and out of the company. Two forms of accounting that all companies should use are financial accounting and management (or managerial) accounting. Companies need to use both financial and management accounting because each serves a different purpose. Receive a comprehensive guide on the difference between financial accounting and management accounting and why both forms of accounting are necessary here.
What is Financial Accounting?
Financial accounting is the regular development of financial reports shared with a company’s internal community and external stakeholders. Companies create financial accounts to demonstrate their financial position. By demonstrating their financial position, companies hope their financial accounts will meet regulations and draw investors. Typical components of a financial account include profit and loss sheets, balance sheets, and cash flow records.
What is Management Accounting?
Management, or managerial, accounting is the regular development of financial reports that are solely shared with a company’s managers and directors. Management accounts are created to help company managers and directors make informed decisions regarding their companies’ daily operations. Managers and directors at companies also use management accounts to forecast company financial performance so that they can plan accordingly.
Financial Accounting vs Management Accounting
There are many differences between financial accounting and management accounting. The aspects of financial accounting vs management accounting that differ from one another include the following:
Period of Time Reported On
One key difference between financial accounting and management accounting is that financial accounts contain company financial data from a past designated period of time. On the other hand, management accounts report current and possible future company financial data.
Businesses use financial accounts to report on their past financial performances to meet yearly company regulations and compliance rules. Companies also use financial accounts to report on past financial performances so that stakeholders can see trends and patterns within company finances before investing.
On the other hand, businesses use management accounts to report on current and future company financial data. This is so that in-house business leaders can constantly track company financial performance for daily decision-making.
Regulation
Management accounts have no mandated regulations and standards. Thus, companies can create their own system and rules for when and how to conduct managerial reports. This is very different from the highly regulated financial accounts.
The regulations and standards that financial accounts must comply with in the United States are Generally Accepted Accounting Principles (GAAP). These rules are established by the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC).
Level of Detail
While financial accounts are transparent, they are also often general. This is because companies create financial statements to only report on the information that the GAAP requires and any possible stakeholders would need to know. On the other hand, in-house management accounts are often very detailed as companies feel free enough to conduct deep reporting on the parts of the company finances that they want to investigate immediately and make important business decisions based on.
Level of Accuracy
Regarding financial accounting vs managerial accounting, the accuracy levels of the two differ. Because companies share their financial accounting reports with stakeholders and regulators, every aspect of financial accounting reports must be accurate.
On the other hand, because only in-house company executives see management accounting reports, management accounting reports can be less accurate with their financial data. Much of the data in management accounting reports is based on educated estimates.
Reporting Frequency
The law requires that companies conduct most financial accounting reports at the end of the financial year. Thus, most financial accounting reports are conducted annually. Because there is no law or mandate that requires management accounting reports to occur within a specific timeframe, companies conduct management accounting reports as frequently or infrequently as they desire. Typically, companies conduct management reporting frequently.
Users
While internal teams within a company can use financial accounts, external stakeholders primarily use financial accounting reports. External stakeholders use financial accounting reports to see whether or not the company at hand is in a financial position to receive their investments. Regulators for U.S. regulations and accounting standards boards such as the GAAP, FASB, and SEC also use financial accounting reports to ensure company finances and processes comply with the necessary laws and regulations.
The people who primarily use management accounting reports are internal managers and directors within a company. Company leaders use management accounting reports to monitor company financial data and use the information to make informed business decisions and forecast future company financial standings.
Valuation
One of the differences between financial accounting vs management accounting is that financial accounting focuses on the overall value of a company’s assets and liabilities. Management accounting, on the other hand, focuses on a company’s daily profits and productivity. To understand a company’s profits and productivity, management accounting reports analyze the company’s assets and liabilities.
Type of Accountant Job
The type of accountant job that conducts financial accounting vs managerial accounting are different. Financial accountants prepare reports on a company’s income and outflow over a designated period of time, typically quarterly or annually. Financial accountants then share their reports with regulators and stakeholders. Managerial accountants prepare financial reports shared within a company’s executive team so that the company executives can make informed business decisions and forecasts.
Bridging the Gap: Collaboration is Key
While financial accounting differs greatly from management accounting, the collaboration of financial and managerial accounting is necessary for a company to achieve financial success. Managerial accounts are important to upkeep daily operations and make internal business decisions, while financial accounts are important to obtain shareholders and maintain regulatory compliance.
If you were only to conduct one form of these two forms of accounting as a business owner, you would likely make poor business decisions that would cause financial loss, whether in the short-run due to not upkeeping managerial accounts or the long-run due to the company having to pay legal fees and invest more in itself than expected as a result of not having your financial accountants create end of the year reporting. To learn more about what you should include in a financial accounting report, consult our blog on financial disclosure components.
