A financial accounting system is aimed at external decision-makers such as investors, regulators, and creditors, while a managerial accounting system is aimed at internal decision-makers such as managers.
What’s the Difference Between Financial and Managerial Accounting?
Managerial accounting focuses on operational reporting and looks to the future by using forecasting. These reports are shared internally within the company, typically with managers and senior employees. Managerial accounting reports are issued more frequently and follow no specific period. On the other hand, financial accounting reports are tightly regulated, especially when it comes to a company’s balance sheet, income statement, and cash flow statement. The information contained in these statements is available for public review and used by investors, which is why companies need to be very careful about how they report figures and make calculations for these. In the U.S., the financial accounting reports of a company are governed by the Generally Accepted Accounting Principles (GAAP) as adopted by the U.S. Securities and Exchange Commission (SEC). Conforming to these rules allows lenders and investors to directly compare companies based on their financial statements.
Which Is Right for You?
Choosing between financial accounting and managerial accounting should not be difficult, and the choice mainly depends on your company’s specific needs and business model.
When Financial Accounting Works Best
Financial accounting reports are typically generalized and concise, and information is less revealing because they are available to outside parties. Most companies will require financial statements regularly. Choose financial accounting if you:
Want to make reports available externallyWant to look at the company’s historical performanceWant to only look at financial dataWant to provide information accepted by outside regulators
When Managerial Accounting Works Best
Managerial accounting reports tend to be more detailed and technical in nature. Companies are often looking for ways to gain a competitive advantage, so they examine a lot of information that might be hard to understand for outside parties. An example would be an internet company that uses cloud computing services for its employees. The monthly rates for renting out cloud space have increased, so a managerial accounting report can detail the company’s budget for cloud services against its actual expenses to see if the increases in cloud services are costing the company too much. Choose managerial accounting if you:
Want to make reports available internallyWant to do forecastingWant to look at financial and operational dataWant to focus on specific management needs
Although it’s entirely possible for a company to only use financial accounting, employing it along with managerial accounting can offer a best-of-both-worlds option: accurate financial information and a clear path to planning for a better future.
The Bottom Line
The key difference between financial accounting and managerial accounting lies in the intended users of information for each. Financial accounting provides financial data to third parties outside of the company, while managerial accounting provides important information that allows managers within the organization to make informed business decisions. Financial accounting must follow certain standards in accordance with GAAP, which is a requirement for businesses based in the U.S. to maintain their publicly traded statuses. Managerial accounting is not intended for external users and can be modified according to the company’s processes.
