Similarities and Differences of Financial and Managerial Accounting

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23rd Sep 2020 Business Assignment Reference this

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Financial and Managerial accounting are “two out of the four largest accounting areas” (Ross,2017).  Financial accounting is the process a company goes through in order to prepare their financial statements to report their financial position to the people with an invested interest such as stockholders, suppliers, creditors, and investors.  Managerial accounting is the process a company works through to create their financial reports so that internal stakeholders like managers can make financial and operating decisions for the company (myaccountingcourse.com, n.d.).  While there are some similarities between the two types of accounting, the differences are shown in compliance, benchmarks, and audience.

Managerial and financial accounting have several parallels.  Both types produce financial reports, are centered on finances, intended for a specific audience, and require a vast knowledge of accounting practices.   They both use an accounting system that accumulates and classifies the financial information for the formation of the accounting statements.  Revenues, expenses, assets, liabilities, and cash flow are all tracked by both managerial and financial accountants.  Both accounting systems are used to determine and measure costs for different accounting periods. 

Financial and managerial accounting have a few similarities but the differences are many.  One main difference is the audience.  Managerial or cost accounting reports are prepared for internal stakeholders.  Employees within the company such as managers and directors use the reports to make decisions for the company.  They can be used to determine how much money they can spend and on what.  Should they invest in new equipment or hire more employees?  Do they need to sell some trucks in their fleet or need to let some employees go?  All of this information helps the managers attain the company’s goals. 

Financial accountants must follow the Generally Accepted Accounting Principles (GAAP) when preparing their reports (graduatetutor.com, 2017).  Financial accounting reports are intended for the owners, lenders, investors, and stockholders.  The financial accounting reports allow the external stakeholders to determine how well or how bad the company may perform in the future.  The reports should also give potential investors and creditors enough information to make financial decisions about the company. 

Another difference in financial and managerial accounting is the regulations each adhere to.  As stated above, financial accounting must follow GAAP.  This is a set of accounting guidelines that require consistent financial reporting and recording.   The financial accounting reports are a summary of how the company is performing overall.  Managerial accounting is not required to follow GAAP.  In fact, GAAP can work against managerial accounting reports.  GAAP requires that expenses like rent and utilities be included in overhead costs.  However, from a managerial standpoint, they may be more interested in administrative costs to help make internal decisions.  

The reports each type of accounting produces and uses are different as well.  Managerial accounting relies on budget reports.  Budgeting helps managers with overspending.  Budget reports provide managers a guide to cut costs, negotiate with vendors, and possibly offer incentives.  Managers also use account receivable reports, material and labor cost reports, and performance reports to make better decisions on company operations and spending. 

Financial accountants put together four types of financial statements for external stakeholders.  The balance sheet records the company’s assets, liabilities, and equity.  It details the revenue and expenses for a certain time period.  The income statement records a company’s profits and losses from both operating and non-operating activities also for a certain period of time.  The statement of cash flows shows how a company’s cash comes in and out of a business.  It reports on where the cash came from and where the cash went.  The final report financial accounting produces is the statement of owner’s equity.  The statement of owner’s equity reports which activities increased or decreased the equity section from the balance sheet.  Financial accounting gives more of an overall picture while managerial accounting gives a detailed summary by product or regions (Garcia, 2107).

Other differences between the two types of accounting include legal requirements, timing, and confidentiality.  Financial accounting reports are required to be filed by the law at end of each accounting period. The information contained in the reports and statements is not kept confidential since external stakeholders use the reports to make decisions like whether or not to invest in the company or lend money to them.  Managerial reports are kept confidential because they contain sensitive information about products and costs.  There are no legal requirements for managerial accounting statements.  Managers can request these statements at any time and with any frequency, they deem necessary. 

While there are similarities and differences, both financial and managerial accounting statements are important for businesses to gauge their profits and expenses.  Both types are crucial for their intended audiences and used to make important decisions.  Each accounting type has value to the companies they report on. 

Works Cited

  • Bragg, S. (2018, December 21). The difference between financial and managerial accounting. Retrieved from https://www.accountingtools.com/articles/what-is-the-difference-between-financial-and-managerial-acco.html
  • Differences between Financial Accounting and Managerial Accounting. Retrieved from https://www.graduatetutor.com/accounting-tutors/difference-between-financial-accounting-managerial-accounting /(2017).
  • Garcia, M. (2019, February 11). Similarities Between Management Accounting & Financial Accounting. Retrieved from https://bizfluent.com/list-6659348-similarities-management-accounting-financial-accounting.html
  • Herold, Thomas, and Wesley D. Crowder. “What Was the Tyco International Scandal?” Herold's Financial Dictionary, 2014, www.financial-dictionary.info/terms/tyco-international-scandal/.
  • Ross, S. (2019, August 6). How Financial Accounting Differs From Managerial Accounting. Retrieved from https://www.investopedia.com/ask/answers/041015/how-does-financial-accounting-differ-managerial-accounting.asp

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