The difference between financial and managerial accounting
/Comparing Financial and Managerial Accounting
Most accounting tasks can be divided into financial accounting and managerial accounting. It is useful to describe the differences between these two aspects of accounting, since each one describes a distinctly different career path. In general, financial accounting refers to the aggregation of accounting information into financial statements, while managerial accounting refers to the internal processes used to account for business transactions. There are a number of differences between financial and managerial accounting, which are noted below.
Aggregation
Financial accounting reports on the results of an entire business. Managerial accounting almost always reports at a more detailed level, such as profits by product, product line, customer, and geographic region. Financial accounting reports are more likely to be distributed to outsiders, while the results of managerial accounting are more likely to only be used by insiders.
Efficiency
Financial accounting reports on the profitability (and therefore the efficiency) of a business, whereas managerial accounting reports on specifically what is causing problems and how to fix them. Managerial accounting reports are more likely to be of use in improving operations, while financial accounting reports are used by outsiders to decide whether to invest in or lend to a business.
Proven Information
Financial accounting requires that records be kept with considerable precision, which is needed to prove that the financial statements are correct. Outside auditors rely on this information when auditing a firm’s financial statements. Conversely, managerial accounting frequently deals with estimates, rather than proven and verifiable facts.
Reporting Focus
Financial accounting is oriented toward the creation of financial statements, which are distributed both within and outside of a company. Managerial accounting is more concerned with operational reports, which are only distributed within a company. Also, operational reports can have a very limited distribution, with some reports only going to one person - whoever is responsible for the area or cost being reported on.
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Standards
Financial accounting must comply with various accounting standards, whereas managerial accounting does not have to comply with any standards when information is compiled for internal consumption. Instead, a management accountant can devise any reporting format at all, though typically structured to present the most actionable information to management in a forceful manner.
Systems
Financial accounting pays no attention to the overall system that a company has for generating a profit, only its outcome. Conversely, managerial accounting is interested in the location of bottleneck operations, and the various ways to enhance profits by resolving these bottleneck issues.
Time Period
Financial accounting is concerned with the financial results that a business has already achieved, so it has a historical orientation. Managerial accounting may address budgets and forecasts, and so can have a future orientation. However, managerial accounting also needs to incorporate historical information into analyses, typically as part of revenue and expense extrapolations.
Timing
Financial accounting requires that financial statements be issued following the end of an accounting period. Managerial accounting may issue reports much more frequently, since the information it provides is of most relevance if managers can see it right away. This means that a managerial accountant might issue reports as frequently as once a day.
Valuation
Financial accounting addresses the proper valuation of assets and liabilities, and so is involved with impairments, revaluations, and so forth. Managerial accounting is not concerned with the value of these items, only their productivity.
Certifications
There is a difference in the accounting certifications typically found in each of these areas. People with the Certified Public Accountant designation have been trained in financial accounting, while those with the Certified Management Accountant designation have been trained in managerial accounting. There are far more people holding the CPA designation than the CMA designation.
Pay Levels
Pay levels tend to be higher in the area of financial accounting and somewhat lower for managerial accounting, perhaps because there is a perception that more training is required to be fully conversant in financial accounting. Also, there are more accountants certified as CPAs who work in the financial accounting area, and employers may feel that they need to pay more to retain these individuals.