Identify the characteristics that apply to managerial accounting as opposed to financial accounting

3 Min. Read

December 27, 2019

The difference between financial and managerial accounting is that financial accounting is the collection of accounting data to create financial statements, while managerial accounting is the internal processing used to account for business transactions.

The certification for each of these types of accounting is different as well. People who have been trained in financial accounting have a Certified Public Accountant designation, while those with a Certified Management Accountant designation are trained in managerial accounting.

The perception that more training is required for financial accounting might be reflected in the higher pay rates of financial accountants over managerial accountants.

The following categories also show the differences between financial and managerial accounting.

SYSTEMS

Financial accounting only cares about generating a profit and not the overall system of how the company works. Conversely, managerial accounting looks for bottleneck operations and examines various ways to enhance profits by eliminating bottleneck issues.

REPORTING FOCUS

Financial accounting is focused on creating financial statements to be shared internal and external stakeholders and the public. Managerial accounting focuses on operational reporting to be shared within a company.

AGGREGATION

Financial accounting looks at the entire business while managerial accounting reports at a more detailed level. Managerial accounting focuses on detailed reports like profits by product, product line, customer and geographic region.

EFFICIENCY

A business’ profitability and efficiency are reported through financial accounting. Managerial accounting reports on what is causing a problem and how to fix that problem.

TIMING

Financial statements are due at the end of an accounting period, while managerial reports may be issued more frequently, to provide managers with relevant information they can act on immediately.

PROVEN INFORMATION

Considerable precision is needed to prove that financial records are correct. Financial accounting relies on this accurate data for reporting, while managerial accounting frequently deals with estimates opposed to proven facts.

STANDARDS

When managerial accounting is made for internal consumption there is no set of standards to compile that information. On the other hand, financial accounting must follow various accounting standards.

TIME PERIOD

Financial accounting looks to the past to examine financial results that have already been achieved, so it is historically focused. Managerial accounting looks to the future with forecasting.

VALUATION

Financial accounting is concerned with knowing the proper value of a company’s assets and liabilities. Managerial accounting is only concerned with the value these items have on a company’s productivity.

This article will also discuss:

Does Managerial Accounting Follow GAAP?

NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.

Does Managerial Accounting Follow GAAP?

Financial accounting reports are distributed inside and outside of a business and are governed by GAAP and IFRS. The external publication of financial statement makes it very necessary to follow regulation to provide correct information.

Managerial accounting reports are shared internally only and are, therefore, not subject to such rules and regulations and are not required by laws to follow any accounting standard.

RELATED ARTICLES

Few outside of the accounting field and executive management arena truly understand that managerial accounting transcends the recording of debits and credits. In fact, managerial accountants play a vital role in keeping companies running.

Three characteristics distinguish managerial accounting from financial accounting: the audience for the information produced, the time period under observation, and the static or dynamic nature of the data.

Managerial accounting focuses on what it takes to keep a business operating profitably. Tracking and projecting revenue and expense needs is critical. The data collected and the results reported help managers choose the best courses of action. Projecting the budget and investment cash flow are important functions that managerial accountants coordinate and lead. Since the outcome of managerial analysis is future-directed, assumptions and projections are used. These can and do change in scenario analysis, and assumptions are present in these projections and analyses.

Of course, financial accounting is also vital. The focus of financial accounting is to record the activity that has already occurred. Complete and accurate reporting is necessary to provide information to external investors, government taxing authorities and consumers. Compliance with accounting principles and government regulations is essential in financial reporting.

Every organization needs people who understand the nuances of managerial accounting. Understanding business results and projections is essential to interpreting data for decision-making.

Historical data is not neglected in managerial analysis. Instead, the insights it provides into past results help predict the future. Decision-makers need to assess whether to stay on course or amend their plans. Being able to adjust to changes in the physical or economic environments rests on the shoulders of today’s business leaders.

Cost accounting is but one key element of managerial accounting skills.

Analyzing and determining costs of products and services is critical to effectively pricing products and services for the marketplace. For example, the profit margin for re-tooling an aircraft engine and that of manufacturing the same engine from scratch wouldn’t be the same. Accurately accounting for all the expenses involved in each product, interpreting the potential market volume for each, and predicting the resources needed for each are functions of cost accounting.

Managerial accounting practices include those skill sets but extend to budget and variance analysis, operational control, risk management, capacity evaluations, and data analysis support to each business unit within an organization.

As a student of managerial accounting, you quickly learn that operational controls are just as important as financial controls. The turnover ratio of employees in the customer service department isn’t expressly reflected in the company’s income statement or balance sheet; however, business leaders know that that turnover rate is an element embedded within the bottom line through onboarding costs, lost productivity and training time.

A knee-jerk reaction to a high turnover rate has to be balanced by management assessment and knowledge of typical industry turnover rates, historical turnover rates and an understanding of the current economic job climate. Businesses might expect a high turnover number in customer service, but if the same occurs within production-line employees, it may be a red flag that warrants immediate concern.

How does one choose between two equally good (or bad) choices? Which product lines are the most profitable? Will bundling products help or hinder revenue generation? Business leaders have to make these choices every day.

Tactical execution and measurements need to be in place to determine the success of strategic plans to enter new markets, expand product offerings, or sell off a well-established part of the business. To be effective, managerial accountants must have the skills to calculate, assess and communicate the options.

Smaller and midsize companies often combine the functions of managerial and financial accounting under one umbrella. Such accounting departments require an equal focus on both aspects to support the needs of the internal and external audiences that will consume the financial data. When the two accounting competencies are combined into one department, it is important for department leaders to possess the knowledge and skills specific to each area.

In larger firms in the United States, managerial accounting departments assume the Financial Planning & Analysis (FP&A) function. FP&A Trends.com acknowledges that the FP&A function has always been around. Business Finance, Budgeting and Planning, Business Planning and Analysis, and Business Control are other names for FP&A.

The eight core competencies evaluated through the Certified Management Accountant exam (CMA) cover the broad spectrum of skills expected from today’s management accounting professional.

In a recent article titled “Risk Management: It’s What We Do,” Strategic Finance magazine describes skills deemed necessary for management accounting:

• Investment Decision-Making
• Planning, Budgeting and Forecasting
• Decision Analysis
• Cost Management
• Corporate Finance
• Performance Management
• External Financial Reporting Decision-Making
• Financial Statement Analysis

An MBA program with a managerial accounting focus equips students with skills that enable them not only to create and evaluate performance reports of all types but also to provide context for the numbers. Skilled managers understand ratio analysis, provide management controls and perform risk assessments. They also serve as the go-to source for data evaluation.

To manage accounting departments and organizations as a whole, today’s financial leaders need decision-making and risk-management skills. By earning an MBA with an emphasis in Accounting, students can gain knowledge of advanced managerial accounting that will enable them to lead a company toward optimal performance.

Learn more about the UWF online MBA in Accounting program.

Sources:

Strategic Finance — Risk Management: It’s What We Do!

FP&A Trends — Around the World, FP&A Goes by Many Names

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