A commonly asked question is the difference between financial accounting and managerial accounting since each involves a distinctly different career path.
Financial accounting and managerial accounting are two of the four largest accounting disciplines, with many similarities in their usage and approach. However, despite these similarities, there are significant differences between the two.
Financial reports are highly regulated and must conform to certain standards, such as the Singapore Financial Reporting Standards (SFRS). Financial accounting reports tend to be aggregated and concise, with the information in the reports more transparent yet less revealing.
Since this information is released for public viewing and is highly anticipated by investors, companies must be cautious in how they make calculations, the way figures are reported and in what order the reports are constructed. Therefore, this makes the reporting process extremely tedious and time consuming. Hence, many companies are looking to automate their reporting process.
On the other hand, since managerial accounting reports are only circulated within a company, each company is free to create its own systems and rules. The reports created can be modified to meet its intended users’ needs, which may vary considerably across companies or even departments. Managerial accounting reports tend to be highly detailed and specific, looking for a competitive advantage that may seem confusing for external parties.
While there might be pros in this system, there are downsides to it. With each company or department free to create its own system and rules, there is no centralized system regulating reports. Hence, systems like DashBod that organize business processes in one place will prevent employees having to spend extra time to find what they are looking for.
In managerial accounting, the main objective is aimed at helping managers within the organization make well-informed decisions. It focuses on operational reports, which are only distributed within a company and may be issued more frequently than financial accounting reports.
Managers and directors use managerial accounting reports to make decisions regarding a company’s daily operations, targeted at locating and solving bottlenecks. Managerial accounting reports at a more detailed level compared to financial accounting, categorizing information into multiple levels to encourage strategic planning and efficient directing of company resources, along with helping business managers set realistic goals.
On the other hand, while having some internal uses, financial accounting is more concerned with informing those outside of a company. Financial accounting is used to present the financial health of a company to external stakeholders such as the board of directors, stockholders or potential investors to see how the company has performed during a specific period of time.
Financial accounting looks at the entire company and reports on the profitability and efficiency of a business. For example, the generation of Annual Financial Reports must be made part of the public record if the business is considered a publicly-traded company on the stock market.
Level of Forecasting
As mentioned earlier, managerial accounting reports at a more detailed level, such as profits by product, product line etc. Additionally, managerial accounting is not concerned with the value of assets and liabilities, but only their productivity, frequently dealing with estimates rather than proven and verifiable facts.
This is a distinguishing feature of managerial accounting as it is not based on past performance but current and future trends. However, managerial accounting is not completely separated from past performance. It looks at past performance and creates business forecasts, which is important since business leaders constantly need to make operational decisions quickly. To do so, they rely on market predictions and future trends in managerial accounting reports to make that decision.
In contrast, the information created through financial accounting such as XBRL or Corporate Tax Reports are entirely historical. As a business’ profitability and efficiency are reported through financial statements, considerable precision is needed to prove that financial records are correct. This is further emphasized as financial accounting addresses the proper valuation of assets and liabilities, and is involved with impairments and revaluation. While investors and creditors may use financial statements to create forecasts of their own, no future forecasting is allowed in financial statements.
Hence, it is apparent that these two independent tracks of accounting would involve different types of accountants.