Managerial Accounting Vs Financial Accounting

Have you ever wondered what are the differences between managerial and financial accounting? Well, throughout this article I will be contrasting the differences between the two. Accounting includes areas such as tax, auditing, costs, and information systems. However, the only area of ​​accounting that is related to this article is cost, because cost is a subset of managerial accounting. Some of the major differences between management and financial accounting include, but are not limited to, GAAP, internal/external reporting, internal/external approach, and unit approach. There are many other themes that I could use for this essay, however I feel that these themes help to better describe the difference.

The first topic I would like to talk about is the difference between managerial and financial accounting through GAAP (Generally Accepted Accounting Principles). A business must follow GAAP to the letter, however with management accounting there are ways around this, because management accounting does not have to worry about following GAAP standards. One of the main points of managerial accounting is cost accounting, and the goal of cost accounting is to help in decision making, budgeting, and also cost analysis. To calculate the cost of a product effectively, many different formulas must be followed that do not need to follow GAAP standards; however, when the information is transferred to the financial side of the company, all GAAP principles must be followed. The number one goal of financial accounting is to have accurate financial statements so that the public or shareholders can continue or withdraw from their investments. Additionally, to comply with SEC requirements, a company must follow all GAAP principles.

Managerial and financial accounting not only follow different principles, but also have different ways of reporting their information. Management accounting focuses more on reporting information to an organization in the business that will help with planning and organizing for the future. Also, the information for each month is saved and then they will use that information to predict what will happen in the future, so all the information collected is very useful. However, financial accounting reports information to a different group of people. Information is collected for the month or quarter and then sent to the CEO or CFO. The next step would be for the CEO or CFO to report the information to shareholders or anyone who makes investments in the company. Although there are big differences between the two, each is equally important.

Next, there is a big difference in the general approach of the two different types of accounting. The management side of the company will focus on projections for the future, because all the information that is collected over the months and years will be useful in predicting what will happen in the future. However, the only focus of financial accounting is to ensure that the financial statements are correct at the end of the period. Additionally, financial accounting is required to ensure that the general ledger and journal accounts are accurate and up to date.

There is not only a difference in the general approach to management and financial accounting, but also in the way each side expresses dollars in units. Managerial accounting focuses on unit costs, which are associated with direct materials, direct labor, and overhead. These are the three components that make up the cost of a product. To correctly calculate the cost of a product, it is important to include these three components in the total cost of the product. Therefore, management accounting focuses primarily on how much money each unit is worth rather than the total price 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 concerned with how much each unit costs, but is more concerned with the selling price of each item that is sold.

In conclusion, there are many differences between managerial and financial accounting, but the main differences I decided to focus on were the differences between GAAP, reporting, approach, and unit approach. The main difference between managerial and financial accounting is that one has to follow GAAP to the letter and the other doesn’t. I cannot stress the importance of GAAP in society, because without its principles the world of accounting would be defenseless. Additionally, there are some differences in the way managers and financiers handle reporting and their general approach as an entity within an organization. Lastly, there are some important differences between managerial and financial accounting, and either way, both are extremely important and one could not function properly without the other.