When it comes to financial accounting vs managerial accounting, the main differences are the manners of collecting, processing, and reporting information. Users of financial and managerial accounting information also have different goals in analyzing and interpreting this information. In this article, we’ll discuss how these two major branches of accounting differ along seven criteria.
Criteria | Financial Accounting | Managerial Accounting |
|---|---|---|
External | Internal | |
United States Generally Accepted Accounting Principles (GAAP) | Needs of management | |
Historical information | Current and future information | |
Annual, as required by laws and regulations | Whenever needed by management | |
Decision-making of external users | Decision-making of internal users | |
Business as a whole | Business as a whole or a specific segment | |
Bookkeeping data or as required by accounting standard | Bookkeeping data, forecasts, and industry benchmarks |
Key Takeaways
- Financial accounting focuses more on providing accounting information to external users. Government authorities like the US Securities and Exchange Commission (SEC) require publicly listed companies to follow the US GAAP for financial reporting. Managerial accounting is more flexible than financial accounting because there are no standards to follow for managerial accounting reports.
- Managerial accounting differs from financial accounting—the former is mainly for internal users, while the latter is for external users.
- Small businesses need not follow the US GAAP to the letter. Not all GAAP principles are applicable for small businesses.
Our small business bookkeeping guide discusses the bookkeeping responsibilities and overall process and also gives a glimpse of financial accounting. Moreover, our guide to managerial accounting explains the importance of this accounting branch and how it can be used for small businesses.
Users of Information
Financial accounting information is mainly for external users like shareholders, creditors, legal authorities and bodies, such as the SEC or local government authorities, potential and current investors, suppliers, and customers. The complete set of financial statements—income statement, statement of changes in equity, balance sheet, and notes—provides external users with information that can help them assess the business’ liquidity, solvency, profitability, and longevity.
On the contrary, managerial accounting information caters to managers, small business owners, and employees. Managerial accounting reports are not intended to be published or circulated to external users because they may include sensitive and confidential information regarding the business’ pricing and costing strategies. Therefore, only people within the business should have access to managerial accounting reports.
Standards
The most notable difference between financial accounting vs managerial accounting is the use of standards. Financial accounting uses the US GAAP issued by the Financial Accounting Standards Board (FASB). Publicly listed companies are required to follow the US GAAP to improve the comparability, understandability, verifiability, and timeliness of financial statements.
Managerial accounting, however, doesn’t comply with any set of standards. Reports are mainly based on the needs of management or whatever an internal user wants to see. For example, a sales manager might want to view only sales information in all segments of the business. From the sales manager’s perspective, looking at the sales report is enough information to make decisions.
Period of Information
Financial accounting aims to report on the business’ activities in the previous fiscal or calendar year. Therefore, financial statements are mostly historical. The US GAAP lays strict rules on how to measure and present items in the financial statements and the basis of this information will be historical information.
Meanwhile, managerial accounting aims to provide information about the business’ current and future condition. That’s why it relies on forecasting to predict future outcomes based on current information. It may also use historical information—but only as a basis for forecasting future outcomes.
Frequency of Reporting
Financial accounting reports are quarterly and annual in nature. That’s why the phrase “for the period ended” or “as of” is always present in financial statements. However, some businesses may produce financial statements more often. Interim reports still follow the US GAAP standards and they are also integral to the annual set of financial statements.
In contrast, managerial accounting doesn’t have a required frequency of reporting. You can generate reports anytime whenever management needs them. It can be daily, weekly, bimonthly, or monthly. Since reports aren’t standardized, they are unique for every business. As long as it aids in making decisions, you can make managerial accounting reports as frequently as you like.
Purpose of Reporting
The purpose of financial accounting is embedded in the FASB’s conceptual framework of financial reporting. It says, “The objective of financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.” In other words, financial accounting’s purpose is mainly for external users, as discussed earlier.
Managerial accounting’s purpose is for management. Reports are mainly for internal decision-making, planning, organizing, and controlling of business operations and functions. It helps managers and small business owners understand resource consumption and constraints, production bottlenecks, system issues, and other aspects.
Focus of Reporting
Financial statements from financial accounting always pertain to the whole business, regardless of the number of subsidiaries or branches. Larger companies with multiple subsidiaries and branches consolidate financial statements as if they were just one company. The performance of subsidiaries and branches may be reported in the notes but they’re not presented in the face of the financial statements.
Meanwhile, managerial accounting reports can be the whole business or only a part. For example, you can create reports for a specific branch of the business so that you can analyze if it’s meeting its revenue and profit goals. You can also generate reports for a specific manager to review if they met the required return on investment for a specific project.
Source of Information
Financial accounting relies heavily on information sources from bookkeeping data or as required by accounting standards. Since the aim of financial accounting is to report on the business’s performance, it is only logical for accountants to use actual financial data.
Meanwhile, managerial accounting uses a plethora of information sources as long the information is relevant to management. Information like bookkeeping data, industry benchmarks, forecasts, stock market information, and statistics may be relevant for managerial accounting. Sometimes, managerial accounting branches to data science and data analytics for more sophisticated data gathering and processing methods.
Overall, managerial accounting has no limit on the kind of information needed, even if such information is already far from accounting. Meanwhile, in financial accounting, accounting standards limit the sources of information because it aims to standardize financial reporting.
Frequently Asked Questions (FAQs)
It’s hard to say one is more difficult than the other. Financial accounting requires strict adherence to rules and attention to detail while managerial accounting requires creativity to assess managerial needs and design reports to deliver the needed information. Naturally, most people tend to have a strong personal preference for either financial or managerial accounting.
No, both branches of accounting have purposes and objectives to accomplish in the business. Managerial accounting is used for internal accounting needs while financial accounting is for publishing financial statements.
Bottom Line
Small businesses need both financial accounting and managerial accounting. With the financial accounting vs managerial accounting examples we provided, we hope that this information enlightened you about their differences and why both are necessary for businesses. To some extent, small businesses need to present financial statements for applying for loans and credit cards. However, managerial accounting can be used for day-to-day accounting since managers and small business owners may need to access reports for decision-making.
