Financial and Managerial Accounting: Whats the Difference

Financial and Managerial Accounting: What’s The Difference?

Whether it is a sole proprietorship, partnership, corporation, or a limited liability company, all businesses survive on the buying/selling of goods and services for cash or credit. They may buy land and build office complexes, stores, or factories. They may buy supplies, equipment, merchandise to sell, and/or the raw materials required to manufacture goods. They hire employees, pay salaries and benefits. All of these “business” activities need to be measured, analyzed, and recorded. Accounting is the set of procedures used to analyze, measure and record said activities. For this reason, accounting is often referred to as the “language of business”. Within the accounting realm, there are two main types: financial accounting and managerial accounting.

Financial accounting generally abides by the GAAP to record the activities of a business and to report the results of a business’s operations. Every transaction that occurs, both big and small, are recorded as an entry in a journal, and each type of activity is given an account in a general ledger (i.e. account payables and account receivables). Journal entries are then sorted by posting them in the appropriate general ledger account. This information (i.e. balances) in the general ledger accounts are what financial accountants use to prepare financial statements such as the income statement and balance sheet.

There are numerous individuals, both inside and outside, the business that use these financial documents:

• Managers use the information to establish how well the business is performing, to

determine what the business is worth, and to make decisions.

• Financial institutions examine financial statements to discover a businesses debts and profitability when deciding whether to approve a loan to the company.

• Investors may analyze financial statements to determine whether they would, or would not, be a sound investment.

• Regulatory agencies, such as the SEC, may examine this data to confirm compliancy to required rules and regulations.

• The businesses competitors may compare/contrast the financial information to their own to see how they are fairing, and/or use the information to gain a competitive advantage (What is Managerial Accounting, Chapter 1).

The focus of managerial accounting is on the decisions made by the management of a business. Managerial accounting organizes accounting information to help plan and operate a business. There are two major differences between financial accounting and managerial accounting.

First, managerial accounting is concerned primarily with decisions made within the business. Therefore, people outside the business are not the intended audience for managerial information. Managerial accounting information is thus used by those individuals within the organization to make business decisions.

Second, managerial accounting is not required to follow any