What is the Difference Between Financial and Managerial Accounting?

The differences between financial and managerial accounting are:

  • Financial accounting focuses on collecting, summarizing, and reporting transactions of a business or organization into financial statements used by internal and external users to measure performance.
  • Managerial accounting focuses on the internal processes of the business to provide internal users (owners, managers, and employees) with information to make decisions within the business.
  • Financial accounting is based on past performance.
  • Managerial accounting is based on current and future performance.
  • Financial accounting must conform to Generally Accepted Accounting Principles (GAAP).
  • Managerial accounting has no fixed rules because it is only used internally.
  • Financial accounting prepares financial statements based on accounting periods (month, year).
  • Managerial accounting creates reports as needed for internal users.

The difference can be illustrated in terms of personal financial information. Filing a tax return is financial accounting. Creating a family budget is managerial accounting.

What is the Relationship Between Financial Accounting and Managerial Accounting?

Although it is often the differences between Financial and Managerial Accounting that are highlighted in accounting textbooks, the more important point is what the relationship between the two is. Financial and Managerial accounting work together to improve business performance and highlight strengths and weaknesses.

Financial accounting reports past performance in financial statements. That past performance is used to chart the future course of the business. This is where managerial accounting comes into play. Let’s look at an example.

From the Financial Accounting side, a company’s financial statements reveal the following:

Net Income (profit) 97,50010%
Table showing an example of expenses and profit as a percent of sales.

From the Managerial Accounting side, a company’s managers can use this information in the following ways:

  1. Are revenues increasing or decreasing compared to past periods? By what percent?
  2. Are expenses increasing or decreasing compared to past periods? By what percent?
  3. Is profit increasing or decreasing compared to past periods? By what percent?
  4. If the company wants to decrease expenses to 85%, how can that be done?
  5. If the company wants to increase revenues by 10% next year, how can that be done?
  6. To increase revenue by 10%, what resources are needed for marketing, sales, production, human resources?
  7. What percent will expenses rise to meet the increase in revenue?
  8. What effect will the increase in revenue and expenses have on profit?
  9. The questions and answers to these and other questions drive the budget process for all departments.

Although Financial Accounting and Managerial Accounting are different in the approach to preparing and reporting information, they are closely tied together in practice. When combined, financial and managerial accounting create a wide array of financial information to make the day-to-day operations of a business stronger.

For more information about how to use financial information to build, improve, and grow a business, check out this article:

Caroline Grimm

Caroline Grimm is an accounting educator and a small business enthusiast. She holds Masters and Bachelor degrees in Business Administration. She is the author of 13 books and the creator of Accounting How To YouTube channel and blog. For more information visit: https://accountinghowto.com/about/

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