Financial and Managerial Accounting Differences
- Targeted Users
- Time Frames
- Information Provided
Most businesses, large or small, rely on both management and financial accounting to help them be profitable and succeed. But for students who wish to major in accounting, it is important for them to learn the differences between these two accounting practices. While there are several factors that distinguish between these two types of accounting, five of the main differences are discussed below.
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Perhaps the biggest difference between financial and managerial accounting is the purpose of each accounting practice. Financial accountants prepare accounting paperwork that provides an accurate report of the company’s financial health and or credit-worthiness. Managerial accounting, on the other hand, provides specific financial information that helps managers and other top company executives make various decisions pertaining to the company.
2. Targeted Users
Another big difference between financial and management accounting involves the persons who will be using the information that the accountants provide. Financial accountants provide financial information for a broad audience of target users that typically includes the Internal Revenue Service, state and local tax agencies, lending institutions, stakeholders, stockholders, and financial analysts. Managerial accounting has a much smaller audience and typically only includes company managers and top company executives.
3. Time Frames
Time frames differ widely between management and financial accounting as well. Financial accountants need to prepare reports at designated times of the year, typically quarterly and annually. This is typically at the end of the company’s fiscal year. Management accountants prepare reports much more frequently but the frequency is highly dependent on the company’s needs. Managers or top executives may request reports weekly, monthly, or more often. Since more than one person in the company may need a report, management accountants may need to prepare multiple reports for several different purposes as well.
The regulations that accountants need to follow when completing financial or management reports also differ broadly. Management accountants only need to follow the regulations set forth by the companies where they work. However, the procedures that financial accountants must follow are heavily regulated. These accountants must follow what is known as Generally Accepted Accounting Principles. This is important to ensure consistency across industries in the case of internal or external tax audits.
5. Information Provided
Yet another big difference between financial and managerial accounting involves the information that each practice provides to targeted users. Reports created by financial accountants provide such information as the company’s year-end assets and liabilities, revenues and expenses, and current and projected cash flow. Reports created by managerial accountants provide a variety of information depending on what is currently needed but may include budget forecasts, sales and revenue forecasts, and costs forecasts.
For businesses to be profitable and succeed, they need to utilize two forms of accounting: management and financial. While both of these accounting practices are essential to businesses today, there are distinct differences between them. Learning the main differences between financial accounting and management accounting can help accounting students decide which specialization to choose when completing their programs.