5.6: Differentiating Between Financial and Managerial Accounting
Learning Outcomes
- Compare and contrast financial accounting and managerial accounting
There will be no numbers to crunch in this module at all ! That sounds kind of odd in an accounting course, doesn’t it? Well, let’s first watch Tony discuss what managerial accounting is:
You can download a transcript for the video “MA Module 1, Video 1, Intro to Managerial Accounting” here .
Now, with that information, how is managerial accounting different from financial accounting? Well, if you remember from the first modules in this course, financial accounting focuses on recording transactions as they occur. So, for example, when you buy something, you record the payable, then you pay the bill. Another example might be, you provided services for a customer. You invoice the customer, await payment, and then deposit the check when it arrives. So essentially, you are recording activities in a historical way. They have happened already.
Now, another big difference is that financial accounting is done for people outside of the company. A bank may want to see your financial statements in order to lend you money. A vendor may want to see your financial statements to extend you credit. The IRS also needs your financial information to access taxes when you file your tax return.
Managerial accounting on the other hand, is done to provide information to managers within the organization. It is used for planning, controlling and decision making. Companies are not required to do the tasks of managerial accounting. You can also do reporting in a segment type of system. This means looking at just one product, one manufacturing line or one segment of your service. These reports don’t need to cover the entire operation of the business, and they do not need to follow generally accepted accounting principles (GAAP). You can prepare your reports from a managerial accounting perspective in whatever way is helpful for decision making.
Summary
So here is the basic overview of how financial accounting differs from managerial accounting.
In small companies, one accountant may be responsible for financial and managerial accounting processes, while larger companies will have multiple people in each role. Because managerial reporting is not required, it can sometimes get put on the back burner at smaller companies who don’t see the importance. As you will see in further modules, the importance of managerial accounting can’t be overstated. Planning and decision making are important in the long term profitability of the company!
Practice Questions