Have you ever wondered what the differences are between managerial and financial accounting? Well, throughout this article I will be contrasting the differences between the two. Accounting includes areas such as tax, audit, cost, and information systems. However, the only area in accounting that relates to this article is cost, because cost is a subset of managerial accounting. Some of the major differences between managerial and financial accounting include but aren’t limited to GAAP, internal/external reporting, internal/external focus, and unit focus. There are many other topics that I could use for this essay, however I feel like these certain topics help describe the difference the best.
The first topic that I would like to talk about is the difference between managerial and financial accounting through GAAP (Generally Accepted Accounting Principles). A firm must follow GAAP down to the tee, however with managerial accounting there are ways around it, because managerial accounting doesn’t have to worry about following GAAP standards. One of the main points in managerial accounting is cost accounting, and the point of cost accounting is to help decision-making, budgeting, and also cost analysis. In order to effectively cost a product there are many different formulas that must be followed which don’t need to follow GAAP standards, however when the information is then transferred to the financial side of the firm, then all the GAAP principles must be followed. The number one goal of financial accounting is to have accurate financial statements so that the public, or the shareholders can continue or walk away from their investments. Also, in order to meet the SEC requirements a firm must follow all of GAAP principles.
Not only does managerial and financial accounting follow different principles, but they also have different ways of reporting their information. Managerial accounting focuses more on reporting the information to an organization in the company that will help with planning and organizing for the future. Also, each month’s information is saved, and then they will use that information to predict what will happen in the future, so all of the information collected is very useful. However, financial accounting reports information to a different group of people. The information is gathered for the month or the quarter, and then sent to the CEO, or the CFO. The next step would be for the CEO or CFO to report the information to share holders or any person who makes investments in the company. Even though there are major differences between the two each are equally as important.
Next, there is a major difference in the overall focus of the two different types of accounting. The managerial side of the firm will focus on projections for the future, because all of the information that is collected throughout the months and years will be useful in predicting what will happen in the future. However, financial accounting’s only focus is to ensure that the financial statements are correct at the end of the period. Also, financial accounting is required to make sure the ledger and the journal accounts are accurate and up to date.
Not only is there a difference in the overall focus of managerial and financial accounting, but the way in which each side expresses dollars in units. Managerial accounting focuses on unit costs, which are associated with Direct Material, Direct Labor, and Overhead. These are the three components, which make up costing a product. In order to successfully cost a product, it is important to include these three components into your overall product cost. So, managerial accounting focuses on mainly how much money are each unit worth rather than the overall price that the product sells for. However, on the other side of the spectrum in financial accounting the focus is on monetary units. Financial accounting is not worried about how much each unit costs, but care more about the sales price of each object being sold.
In conclusion, there are many differences between managerial and financial accounting, but the main differences that I decided to focus on were the differences between GAAP, reporting, focus and the unit focus. The main difference between managerial and financial accounting is that one has to follow GAAP to the tee and the other doesn’t. I can’t stress the importance of GAAP in society, because without its principles the accounting world would be helpless. Also, there are some differences in the way that managerial and financial handle there reporting and their overall focus as an entity inside of an organization. Lastly, there are some major differences between managerial and financial accounting, and either way both are extremely important, and one wouldn’t be able to run properly without the other.