At first glance you might think financial accounting and management accounting are pretty much the same thing, but in reality there are significant differences between the two. Each style of accounting functions in a different kind of way.

Managerial accounting serves in the capacity of providing information to managers and internal members of an organization. Financial accounting's function is to provide information to outside stakeholders, such as creditors and stockholders, who are interested in and have a financial investment or stake in a company.

While both kinds of accounting use the same financial data to calculate figures, it is the objectives for using them which vastly differ. Accounting is comprised of several processes: recording, estimating, organizing and summarizing the financial and operations data in order to make decisions.

When you break it down a little more, this is where the more distinguished differences arise between financial and managerial accounting:

*Financial Accounting

Financial accounting reports to external users such as lenders, owners (stockholders), tax authorities, and regulators. These reports are made to be publicly viewed and have specific regulatory formats they must follow. The financial reports are required to disclose specific financial activity.

It is vital that financial statements generated for purposes of financial accounting fall in accordance with Generally Accepted Accounting Principles (GAAP) and the stipulations are followed to provide accuracy. This is mandatory for the generation of external reports which are created with the intention on being released to the public which includes summary data encompassing the entire organization.

A significant component of financial accounting is it should emphasize the financial costs of prior activity with a degree of objectivity and verifiability. Precision is another important factor of financial accounting. These are figures which will be relied upon for all interested parties and they should reflect integrity, and accuracy.

*Managerial Accounting

Managerial accounting is a different approach to accounting. This accounting method is a managerial tool which is much more effective in making internal decisions to help determine growth and assist with decision making than financial accounting is.

Managers often rely upon managerial accounting techniques, as opposed to financial accounting approaches, because the reports generated offer different insight which is invaluable to the decision making process and information is more current. In order to make strong decisions, having the most up to date data is important.

It is necessary for those in an organization who are involved with planning, directing and motivating, controlling and performance evaluation to utilize managerial accounting. This method is more effective for managers to assess scenarios and make good judgment decisions using information available.

Managerial accounting reports emphasize decisions for the future, timeliness and details about different departments, products, customers and employees, not just the organization as a whole as financial accounting does.

Since these reports are meant to be used internally and not released for public viewing, they are not required to follow GAAP guidelines. Managerial accounting is not a mandatory practice, but it is useful for internal knowledge because it can offer relevant information for managers so they can make solid decisions relating to the direction of the business and its growth.

It is helpful to understand the differences between financial and managerial accounting if you are in a capacity where you are making decisions based on available financial information.

Learn more about this author, Leigh Goessl.
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