There are four main branches of accounting: tax accounting, auditing, financial accounting, and managerial accounting. The latter two branches share several similarities but as a business owner, it’s important to understand the key differences.
Financial accounting is mainly for external use. Financial accounting reports are for people outside of the business itself, such as shareholders, creditors, investors, and the authorities. This branch of accounting is about disclosing the business’ performance to the outside world, rather than being used for planning or internal financial management.
Managerial accounting, on the other hand, means producing information that a company can use to grow and improve itself. This branch of accounting is central to planning, strategy, goal setting, and proper allocation of resources. Therefore managerial accountants report to personnel inside the business, such as managers and directors.
Past vs Present
Financial accounting creates historical information about a company rather than forecasts and projections for the future. It’s based strictly on proven facts. However, creditors, investors, and the like often use financial accounting information to create their own forecasts.
Since managerial accounting information is used internally, it is frequently used to create forecasts. Managerial accounting information is not disclosed outside of the business but is rather used to plan ahead and inform business decisions.
In this sense, managerial accounting is more about looking forwards whilst financial accounting is strictly about looking back.
Since financial accounting reports are disclosed outside of the business, they are strictly regulated through a centralised system. This is because this information is for public consumption and thus it’s important to make sure that figures are not fudged, manipulated, or misconstrued.
Managerial accounting, however, is not subject to such strict regulation since the information remains private. Each business must create its own system and rules around reports and enforce uniformity.
Financial accounting requires substantial proof to back up records and reports, whereas managerial accounting involves far more estimates and predictions.
As a general rule, financial accounting reports are concise and comprehensive whilst managerial accounting reports are more technical and go into far greater detail.
Managerial accounting reports are tailored to the specific needs and culture of each company, whereas financial accounting reports are far more straightforward since they are intended for an external audience.
Since financial accounting is tightly regulated, financial statements must be completed at the end of an accounting period. However, businesses have free reign with managerial accounting. Often, managerial reports are created far more frequently to enable managers and directors to make fast and well-informed business decisions.
Financial accounting looks at profit and loss, rather than a map of the business. Managerial accounting, meanwhile, is used to identify areas for improvement and eliminate waste, resulting in a more efficient and profitable business.
The differences between financial accounting and managerial accounting can all be linked back to their respective target audiences.
Financial accounting is about delivering accurate financial information to external parties. This means it is subject to strict regulations and a particular time frame and is based solely on proven facts.
Managerial accounting information, on the other hand, is used by people inside the business to make informed decisions and thus is not required to conform to such strict standards.
Companies need both branches of accounting, so it’s essential for managers and business owners to understand the difference between the two.