How to Decide Between Financial Accounting and Managerial Accounting

You must be thinking about studying finance which eventually brought you here. Well, it is a universal fact that finance is an ever-green field with limitless scope. You will find here key points on two leading fields of finance; financial accounting and managerial accounting. When it comes to selecting any one of them, i.e. you need to look at the course outline and your interest areaThere are many similarities between managerial and financial accounting since both of them use information from the enterprise accounting system. One of the sections of this system is production accounting, which accumulates data on production costs necessary in both financial and managerial accounting. For instance, production accounting data is usually used to help specialists in setting prices for manufactured products. It isan application of the information in management accounting. The same production accounting data are used to estimate stocks when compiling the balance sheet of an enterprise.

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However, these two types of accounting are significantly different from each other. Here is the list of noteworthy differences:

a) The purpose of accounting

Financial accounting

The purpose of financial accounting is to provide the data necessary for the preparation of financial statements (financial documents) of an enterprise. The same financial statement is intended for its own administration and for external users. For external users, investors, and lenders it helps to provide themwith an objective assessment of the financial situation of the enterprise, its solvency, creditworthiness, assess the degree of profitability of investments in this enterprise. Financial accounting must be carried out in accordance with clearly defined requirements and standards.

Managerial accounting

Managerial accounting is the main communication system within the enterprise. Its purpose is to provide relevant information to the managers responsible for achieving specific production indicators. Management accounting provides the collection and processing of information for planning, management, and control within the organization.

b) Sources of information

Financial accounting

For financial accounting, information sources are only the data of the enterprise accounting system. It accumulates financial information and also the elements of the tax system.

Managerial accounting

For managerial accounting, information sources and data from the enterprise accounting system is information on the norms of consumption of material resources, technological waste, and research on the market situation. The managerial accounting further covers the reports on scientific research, the possibility of using their results in appropriate production conditions, the number of penalties for non-fulfilment by the parties of clauses of economic contracts, etc.

c) Compulsory accounting

Financial accounting

Financial accounting is the official accounting, its maintenance is mandatory for all enterprises and organizations without exception. Financial reporting documents are submitted to the tax authorities, are subject to audit, and should be published.

Managerial accounting

Whether or not management records should be kept, is decided by the management of the enterprise itself. No external bodies or organizations have the right to indicate what is necessary or what should not be done. Therefore, there is no point in collecting and processing information whose value for management is lower than the cost of obtaining it.

d) The main users of information

Financial accounting

Financial accounting is sometimes called external accounting. As a rule, its results are published, and the reports do not only contain financial information, but also advertising materials demonstrating the success of enterprises in their activities and their new products. Users of financial statements are traditionally located outside the enterprise. This information is necessary for both fiscal government bodies and company shareholders, holders of bonds and other securities, and potential investors.

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Managerial accounting

Management accounting can, accordingly, be called internal accounting. Its results are used only by the management personnel of the enterprise. This is a kind of “kitchen” of the enterprise, where materials are prepared for managers.

e) Accounting rules

Financial accounting

Financial accounting is clearly regulated. It is regulated not only by state regulations but also by international standards.

Managerial accounting

Norms and rules of management accounting are established by the enterprise. The management staff of the organization can follow any internal accounting rules, depending on the usefulness of these rules. The main argument in substantiating the rules of management accounting is whether it is useful.

f) Forms of presentation of information

Financial accounting

Financial information is submitted to the statistical authorities, to the tax inspectorate in the forms and is then approved by the Ministry of Finance of the respective country’s Federation, the Ministry of Taxes and Levies and other central departments. They are the same for all enterprises, regardless of their legal form.

Managerial accounting

The results of management accounting can be presented in any form; mandatory forms and many other types of form for the presentation of the financial situation.

g) The main objects of accounting

Financial accounting

In financial statements, an entity is generally described as a whole. Large enterprises with diversified activities need to reflect revenue and income for each industry, i.e. in large segments of the enterprise.

Managerial accounting

Management accounting usually includes information on the activities of individual business units: departments, workshops, plots, and jobs. The object of accounting canals be a separate management task, a specific area of ​​activity.

h) Ways to reflect accounting information

Financial accounting

Financial accounting covers information generated in the field of monetary process. The financial statements of the enterprise include the final balances for all accounts of General Ledger. Business transactions are recorded on accounts necessarily by a double-entry system.

Managerial accounting

Registration of management information does not have to rely on a double-entry system and accumulate in the accounts of General Ledger. In management accounting, any system that is useful for collecting and analyzing information can be used.

I) Meters of accounting information

Financial accounting

To summarize the business processes in financial accounting, money meters are used. They are universal and are expressed in Dollars.

Managerial accounting

Managerial accounting uses all kinds of meters: in-kind, labour, money, etc.

j) Accounting principles

Financial accounting

Financial accounting is based on generally accepted principles, such as the principle of double-entry, the principle of isolation of the enterprise, comparability of data, etc. These principles are guided by both accountants and regulatory bodies.

Managerial accounting

Managerial accounting does not have generally accepted principles; the main thing is simplicity and ease of use.

k) The frequency of reporting

Financial accounting

For financial statements, set deadlines are strictly defined. It is compiled and presented at the end of each quarter and for a year.

Managerial accounting

In management accounting, reports can be compiled daily, weekly, monthly, quarterly, and annually. The deadline for submitting such reports is set directly by the enterprise management; there is no strict periodicity here. The main thing is that the report is useful to the user and received by him at the right time.

l) Attitude to the time the information was made

Financial accounting

Financial accounting reflects the financial history of the enterprise. In it, business transactions are recorded on the basis of documents confirming their completion. This type of accounting deals with facts that have already occurred in the economic life of the enterprise.

Managerial accounting

The purpose of management accounting is to develop recommendations for the future based on an analysis of the events that have occurred.

Financial accounting shows “how it was,” and managerial accounting elaborates “how it should be.” This is why management accounting is sometimes called forward-looking accounting.

m) The degree of reliability of the information

Financial accounting

Financial information reflects transactions that have already been completed. Therefore, it is objective in nature and can be audited.

Managerial accounting

Managerial accounting to a greater extent deals with operations related to the future. Therefore, the information in management accounting can be probabilistic and subjective in nature.

Conclusion

The issues of at enterprises are currently coming to the fore in connection with the transition in the field of accounting to international standards. The management of enterprises and chief accountants must clearly understand the subsystem of managerial accounting, its functions, tasks, and construction.

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