6 differences between management and financial accounting
People who do not routinely engage in accounting practices may initially think that financial and managerial accounting are the same thing. On the surface, the actual crunching the numbers associated with financial data has a lot of similarities because both accounting types use much of the same data.
While it is true there are some similarities, there are also some distinct differences. By taking a closer look at both types of record keeping, these differences become a bit more apparent as each serves its own function and purpose.
On the other hand, financial accounting reports are basically generated in order to provide external interested parties with relevant financial information so the various stakeholders can make decisions. Examples of external interested parties would be stockholders, potential investors or creditors.
Managerial accounting reports are internally generated and used, and are not needed to be disclosed publicly. Managerial reports do not get published the way financial accounting statements do.
Since reporting done under managerial accounting is only generated for managerial decision making purposes, these reports are far less stringent, carry no specifications except those indicated by individual managers, and are not required to follow GAAP guidelines.
Managerial accounting reports can afford to make mistakes from a legal perspective, but could result in bad decisions being made; no legal repercussions will occur if those errors are made. However, timely information is crucial. The reports generated through the managerial accounting approach contain much more current information and can give estimates rather than precise data; these estimates can be calculated quickly which is conducive to decision making.
While there are many similarities between financial and managerial accounting, the differences are distinct. It is helpful to understand these differences depending on your interest, role and/or relationship with an organization.
 |
| Image credit: Pixabay |
While it is true there are some similarities, there are also some distinct differences. By taking a closer look at both types of record keeping, these differences become a bit more apparent as each serves its own function and purpose.
6 differences that exist between management and financial accounting
1. Purpose
Managerial accounting assists in the decision-making process. The reports generated through managerial accounting practices are essentially created to provide decision makers and other internal members of the organization who have a need to know the information contained in the report; this information helps them make better decisions.On the other hand, financial accounting reports are basically generated in order to provide external interested parties with relevant financial information so the various stakeholders can make decisions. Examples of external interested parties would be stockholders, potential investors or creditors.
2. Public and private viewing
Financial accounting reports to external users such as lenders, owners (stockholders), tax authorizes and regulators. Reports generated under financial accounting principles are specifically tailored to be available for public viewing and disclosure.Managerial accounting reports are internally generated and used, and are not needed to be disclosed publicly. Managerial reports do not get published the way financial accounting statements do.
3. Legal requirements
Financial accounting reports must comply with Generally Accepted Accounting Principles (GAAP) and have to follow these terms to ensure accuracy. If any kind of fraud or misrepresentation occurs with financial statements, the company will be reprimanded and face consequences if caught misreporting.Since reporting done under managerial accounting is only generated for managerial decision making purposes, these reports are far less stringent, carry no specifications except those indicated by individual managers, and are not required to follow GAAP guidelines.
4. Past vs. future
Financial accounting has an emphasis on what has already occurred, whereas managerial accounting tries to use data to predict trends, probabilities and use this information to plan for the future. Past events are important to external parties and current reports that can predict or show trends are far more valuable for those who are internal members and need to make timely decisions.5. Precision
While precision is vital with both types of accounting, in financial accounting there is not a lot of wiggle room available for mistakes, data shared must be accurate. Since financial statements are created with the intention of being released to the public, precision is vital.Managerial accounting reports can afford to make mistakes from a legal perspective, but could result in bad decisions being made; no legal repercussions will occur if those errors are made. However, timely information is crucial. The reports generated through the managerial accounting approach contain much more current information and can give estimates rather than precise data; these estimates can be calculated quickly which is conducive to decision making.
6. Mandatory vs. optional
Financial accounting is a mandatory practice that is required by every organization. On the other hand, managerial accounting is not required and organizations can choose whether or not they prefer to invest in managerial accounting practices; essentially these reports are an optional decision making tool.While there are many similarities between financial and managerial accounting, the differences are distinct. It is helpful to understand these differences depending on your interest, role and/or relationship with an organization.
Comments
Post a Comment