Financial vs Managerial Accounting

Learning Outcomes

  • Compare and contrast financial and managerial accounting

Financial Accounting

Illustration of a white person holding a report with charts and graphs.Financial accounting information appears in financial statements that are intended primarily for external users, like stockholders and creditors. These outside parties decide on matters pertaining to the entire company, such as whether to increase or decrease their investment in a company or to extend credit to a company. Consequently, financial accounting information relates to the company as a whole, while managerial accounting focuses on the parts or segments of the company.

Drawbacks of financial accounting, especially for internal users, include:

  • Lack of timeliness (financials are retrospective, not current or prospective)
  • Fixed format

Advantages of financial accounting, especially for external users, include:

  • Usually verified and/or verifiable
  • Consistent formatting from period to period and between firms (consistent and comparable)

Managerial Accounting

Managerial accounting is the accounting that provides managers and owners (internal users) with financial information that they need in order to make operational and strategic decisions. The information managers use may range from broad, long-range planning data to detailed explanations of why actual costs varied from cost estimates.

A man holding a briefcase and the business section of the newspaper.Some of the ways internal users employ managerial accounting information include the following:

  • Assessing how management has discharged its responsibility for protecting and managing the company’s resources.
  • Shaping decisions about when to borrow or invest company resources.
  • Shaping decisions about expansion or downsizing.

In addition, managerial accountants often help prepare financial statements. Therefore, managerial accountants must be knowledgeable concerning financial accounting and reporting.

Drawbacks to managerial accounting that make it less ideal for external users include:

  • Inconsistent from company to company
  • Not usually audited or verified by an outside firm

Advantages of managerial accounting for the internal users include:

  • Flexibility and adaptability
  • Real-time results and projections that don’t need to go through a lengthy audit process

Other Areas of Accounting

There are some other specific areas of specialty as well, including government and non-profit accounting, forensic accounting, and tax accounting.

Non-Profit Accounting

Non-profit entities, as the name implies, exist for purposes other than making a profit. Instead of business owners, a state incorporates a non-profit to benefit the public, so the major stakeholders are the public, or in the case of some clubs, the members.

Common non-profits include charities, social service organizations, churches, and advocacy groups. The accounting for these organizations is more focused on how money is used to advance the purpose of the organization. In addition, nonprofits can apply to the IRS for non-taxable status, commonly under either IRC Section 501(c)(3) or 501(c)(4). Because of the significant differences between accounting for business transactions and accounting for non-profit organizations, this is an area of potential specialty for accountants.

In addition to special rules for non-profit organizations, governmental accounting (that would include federal, state, and local governments as well as quasi-governmental organizations such as schools and water districts) is a specialized field that does not focus on profit but on accountability.

Forensic Accounting

Forensic accounting involves investigating and reporting on financial crimes, fraud, and harmful business practices. Forensic accountants may be called upon to testify in court, and the work product of a forensic accountant may be admitted as evidence.

Tax Accounting

Government agencies that track and use taxes are interested in the financial story of a business. They want to know whether the business is paying taxes according to current tax laws. The language in which tax-related financial statements are prepared is called IRC or Internal Revenue Code. Tax accountants prepare income tax returns and help clients understand and apply the tax code for both compliance and planning purposes.

Practice Question

Next, let’s look at how the government uses accounting information.