June 14, 2018

Do you know the Difference between Financial Accounting and Managerial Accounting?

Financial accounting is for creating financial statements. The 3 most common of which are balance sheet, income statement, cash flow. There are different ones for governments and not-for-profits but are basically same. The financial statements are used by third parties–investors in the case of businesses, citizens/taxpayers in the case of governments, and donors in the case of not-for-profits. The third parties reads the financial statements to decide whether or not to invest in a business, or to donate to not-for-profit. Businesses have to follow strict guidelines on how they report their financial statements. US business have to follow US GAAP (General Accepted Accounting Principles). Government accounting is not so strict and doesn’t follow GAAP.

Managerial accounting is use for management. They don’t have to follow any guidelines and are not intended for third parties to read. Another name for managerial accounting is “Cost Accounting”. It’s about how to cut cost and improve efficiency.

Managerial deals more with internal operations, as it name describes it “Management”. It involves more analyzing, interpreting, decision making, forecast, and comparing projected results against actual results. It also involves keeping track of of activities such as Inventory (for a manufacturing firm) that requires the tracking of raw material, work in progress, finish goods, labor, overhead, etc. Keeping track of these operations affect the profitability of the company, that is why managerial decisions are very important. Also, keeping track of the costs and other operations of your daily activities will in turn reflect in the financial statements, which is what external parties would be looking at.

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