Learning Outcomes
- Compare and contrast managerial and financial accounting
Financial accounting involves producing periodic reports called financial statements to inform external groups like investors, boards of directors, creditors, and government or tax agencies about a company’s financial performance and status. Some statements, like the income statement, retained earnings statement, balance sheet, and statement of cash flows are published at fixed intervals to summarize the historical earnings performance and current financial position of a company. Financial statements are prepared according to Generally Accepted Accounting Principles (GAAP), which helps ensure the information is relevant (useful and timely for making decisions), reliable (accurate and unbiased), consistent (prepared the same way each time information is reported), and comparable (prepared the same way by different companies).
Managerial accounting is targeted more toward a company’s managers and employees. The information gathered and summarized for these internal groups is customized to provide feedback for planning, decision making, and evaluation purposes. Managerial reports do not necessarily follow any particular format, but instead are uniquely designed to meet the needs of specific users. Analyses are often focused on targeted segments of a business rather than on a company as a whole. Information may be published over periodic time intervals or on an as- needed basis. Although managerial accounting incorporates actual financial data from past periods, the focus is on current estimates and future projections.
| Financial accounting | Managerial accounting | |
| Users | External—usually shareholders, financial analysts, and creditors | Internal—usually managers |
| Purpose | Investment, extending credit, tax reporting | Planning, directing, and controlling operations |
| Rules | Must comply with generally accepted accounting principles (GAAP) | No rules other than best practices |
| Perspective | Uses historical (or past) data | May use estimates of the future for budgeting and decision making |
| Time Period | Quarterly or annual | Daily or weekly |
| Scope | Presents summary data, costs, revenues, and profits for the entity | Presents more detailed data about product, department, or territory |
Even though these two types of accounting differ significantly because of the audience (internal users = managerial, external users = financial), they both rely on the same database of information. However, managerial accounting goes beyond just the historical information found in the financial accounting records and integrates sales forecasts, units of production, labor requirements, and a vast array of other data. In fact, managerial accountants are often feeding information, such as the cost of goods sold, into the financial accounting records, as well as extracting historical information from those records for analysis purposes.
Ultimately, managerial accounting is focused on the present and the future while financial accounting is focused on the past.
Here is a short video review of financial accounting v. managerial accounting:
You can view the transcript for “Financial Accounting vs. Managerial Accounting” here (opens in new window).
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