Difference Between Managerial and Financial Accounting

Difference Between Managerial and Financial Accounting


January 26, 2012

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The economic information is an integral part of the accounting information system. This economic information could be categorized in several areas. But as a part of accounting information system, accountants have classified the economic information into two areas: financial accounting and managerial accounting.

The relationship between financial accounting and managerial accounting is based both on the similarities and dissimilarities. That means, though financial accounting and managerial accounting both are the part of economic information, but there are also some dissimilarities prevail between financial accounting and managerial accounting. A proper understanding of accounting information is very much essential to realize the need of management.

The financial and managerial accounting are described with appropriate examples by following discussion:

Financial Accounting

Financial accounting is used by external users (who want accounting information but they are outside of the organization) as it provide reports financial information to the external users. Examples of some external users include shareholders, creditors, government agencies, and the general public.

In most cases management also uses the financial accounting information in directing current operational activities of business and planning future operations, which are the most significant task of accounting information system and both are interrelated. For example, for planning future operations, management often starts with the process of evaluating the results of past activities which are reported in the financial statements.

According to generally accepted accounting principles (GAAP), the financial statements impartially and occasionally report the results of previous operational activities and the financial condition of the business.

Managerial Accounting

This economic information includes both historical and estimated data. Managerial accounting is used by management and internal users (who run and operate the business inside the organization). For example: the management, the supervisors, and the production supervisor, the director are the proper examples of internal users.

The internal users use managerial accounting for operating daily operational activities, planning future operations, and developing overall business strategies.

Managerial accounting information is used in the business according to the needs of management. The managerial accounting reports both objective measurement of previous transaction and subjective estimates about future decisions to the internal users. The subjective estimate reported in managerial accounting is beneficiary for management for generating the business opportunities and overall management.

The managerial accounting does not need to report the economic information according to generally accepted accounting principles. ‘ Managerial accounting information is used for only management purposes, so the information only needs to fulfill the quarries of management.

Moreover, managerial accounting reports may be provided by the accountants both periodically or according to the needs of management. For example, if senior management is making a decision based on a geographical expansion, then a managerial accounting report can be developed in a format and within a time frame that can assist management in the decision making. The reports of managerial accounting also could be prepared to report information for the business entity or a segment of the entity, such as a division, product, project, or territory.

Without proper understanding of managerial and financial accounting, the need of management of the any business would not realize. So both the economic information should be assessed accurately by the accountants







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