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Financial Accounting vs Managerial Accounting

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Financial transactions

by economypedia
written by economypedia

In accounting, a financial transaction in accounting is an event that impacts on the monetary value of an asset, a liability, or the owner’s equity of a business and causes it to change. A financial transaction is characterized by the monetary impact it has on the financial statements of the business created by recording it’s details in an accounting register called journals. An event that does not impact on the business financially or monetarily is not recorded in the journals.

 

What is the purpose of recording a financial transaction in accounting?

Business stakeholders like managers, investors and funders need relevant and timely information to help them make financial decisions about the business resources under their control. In accounting, this information is supplied by financial reports that inform stakeholders of the current financial position and performance of the business. By recording financial transactions that impact on the assets, liabilities and owners equity of a business, stakeholders are able to stay constantly informed of the changes taking place in the financial position and performance of the business.

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AccountingF

Financial Accounting

by economypedia
written by economypedia

Financial accounting is a specialized branch of accounting that keeps track of a company’s financial transactions. Using standardized guidelines, the transactions are recorded, summarized, and presented in a financial report or financial statement such as an income statement or a balance sheet.

In simple terms, financial accounting is the practice of accounting for all money going in and out of an organization. It involves recording, classifying, summarizing, and analyzing all financial transactions.

Why Is Financial Accounting Important?

Financial accounting is important for businesses because it helps them keep track of their financial transactions. In turn, they can make sound decisions on how to allocate their resources. In addition, financial accounting helps you communicate your business finances to outside parties such as creditors and investors. The financial statements generated provide all the necessary information to other parties, which will either encourage or discourage them from partnering with your business.

Who uses financial accounting? 

External stakeholders use financial accounting to see the current state of business. For example, shareholders will want to see financial reports before deciding to invest in a business. While suppliers need to see a firms’ financial health before extending credit for services. Next, brokers use a company’s financial reports to determine the value of its stocks and shares. And auditors, governments, and regulatory bodies rely on financial reporting to ensure legal and tax compliance.

Financial accounting should not be confused with managerial accounting, which is used internally by managers (hence the name) to help guide decision-making within a business. Whereas financial accounting, as we’ve just established, serves external stakeholders.

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Managerial Accounting

by economypedia
written by economypedia

Managerial accounting is the practice of using accounting information — from revenues to production inputs and outputs affecting the supply chain — internally, in support of organization-wide efficiency and for tracking the organization’s progress toward attaining its stated goals.

The basic function of managerial accounting is to help the management make decisions. There is no fixed structure or format for it.

What Is the Value Of Managerial Accounting?

While both managerial accountants and financial accountants may occasionally make use of the same data, the scope of managerial accounting is much wider. Managerial accounting supports a broad understanding of cost versus benefit. Managers faced with specific decisions may request information on any number of business operations to chart the best possible course of action.

Types of Managerial Accounting

  1. Product Costing and Valuation
    Costs can be bifurcated into the variable, fixed, direct, or indirect costs. Cost accounting helps in measuring and identifying these costs as well as assigning overheads to each type of product or service. Product costing, thus, determines the total costs incurred in the production of a good or service.
    Managerial accounting helps in calculating and allocating overhead charges to assess the expenses or costs related to the production of a good or service. The overhead expenses can be allocated on the basis of the number of goods produced, the number of hours run, the number of machine-hours, the square footage of the facility or any other activity drivers related to production. Managerial accounting also uses direct costs for the purpose of valuing the cost of goods sold and inventory.
  2. Cash Flow Analysis
    Cash flow analysis helps in determining the cash impact of business decisions. Most companies follow the accrual basis of accounting to record their financial information as it provides a more accurate picture of a company’s true financial position. However, it also makes it difficult to measure the true cash impact of a single financial transaction. By implementing working capital management strategies, one may optimize cash flow and ensure that the company has enough liquid assets to cover short-term obligations. While performing the cash flow analysis, one needs to consider the cash inflow or outflow generated as a result of a specific business decision.
  3. Inventory Turnover Analysis
    Inventory turnover involves a calculation of how many times the inventory has been sold and replaced in a given period of time. It helps businesses in making better decisions on pricing, manufacturing, marketing, and purchasing inventory. Inventory Turnover analysis also helps in identifying the carrying cost of inventory. The carrying cost of inventory is the amount of expense a company incurs to store unsold items.
  4. Constraint Analysis
    Reviewing the constraints within a production line or sales process is also a part of Managerial accounting. It involves determining where bottlenecks occur and calculating the impact of these constraints on revenue, profit, and cash flow. This information is useful to implement changes and improve efficiencies in the production or sales process.
  5. Financial Leverage Metrics
    Financial leverage refers to the use of borrowed funds in order to acquire assets and increase its return on investments. Through balance sheet analysis, the company’s debt and equity mix in order to put leverage to its most optimal use can be studied. Performance measures such as return on equity, debt to equity, and return on invested capital help the managers to identify key information about borrowed capital.
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AccountingFFeatured

Financial Accounting vs Managerial Accounting

by economypedia
written by economypedia

Financial accounting is concerned with providing information to stockholders, creditors, and others who are outside an organization.

While,Managerial accounting is concerned with providing information to managers i.e. people inside an organization who direct and control its operations.

In addition, managerial accounting is used for projections and running the business on a daily basis. There are no official set of accounting standards for managerial accounting like there is for financial accounting (U.S. GAAP).

Below is a summary for each type of accounting:

Types of Accounting

CharacteristicsManagerial AccountingFinancial Accounting
intended UsersInternalExternal
StandardsNoneUS. GAAP
FocusForecastingHistorical
FrequencyAs-neededEnd of period

Managerial Accounting

  • Intended users: The intended users of managerial accounting financial statements is the internal management team of the company. Management would create these financial statements to help them run the business efficiently and effectively. There are no rules when it comes to managerial accounting! Its the wild wild west!
  • Standards: None! There are no standards that must be followed when creating financial statements using managerial accounting.
  • Focus: When it comes to the focus or the purpose of managerial accounting, its to create financial information that cane be used for forecasting, budgeting, or planning.
  • Frequency: Managerial accounting financial statements are prepared on an as-needed basis. Some management teams prefer to have the financial information prepared weekly while others may only do it on a quarterly basis. It’s completely up to the management team of the company!

Financial Accounting

  • Intended users: The intended users in financial accounting financial statements are investors, creditors, etc. Financial accounting statements would not typically be used for internal decision making.
  • Standards: For companies located in the United States, U.S. GAAP must be followed. Outside of the United States, companies would follow IFRS or a similar set of reporting standards.
  • Focus: The focus is on the historical results and summarizing the results over a specific period of time.
  • Frequency: In financial accounting, financial statements are typically prepared on a monthly basis, with results communicated to the general public on a quarterly and annual basis.
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