Surely we all agree that the accounting of any company is mandatory for the financial management of any business model. But within accounting, there are three main areas:
- Management accounting
- Cost accounting (a part of managerial accounting)
- Financial Accounting
Before jumping to the topic of managerial accounting vs. financial accounting, we need to understand what these terms are and what role do they play in an organization. How do these processes benefit a company and then we will be able to discuss the similarities or differences among them.
Management accounting is the type of accounting focused on the proper functioning and defence of good practice in companies. It is based on the collection of information about the company for its managers. The fact that the presentation of information regarding this accounting is not legally obligatory does not make it less important. This is a type of information reserved for internal users of the company, which helps the company in making future decisions for progress.
Why is it used?
Through managerial accounting, the administrators and owners of a company have the possibility of undertaking successful projects or making strategic decisions for the company’s prosperity. Thus, this accounting approach focuses on the monitoring and collection of data necessary for the constant knowledge of the position of the company by its managers. But isn’t financial accounting supposed to represent a true and true image? Indeed, but sometimes the company manipulates its balance sheets and offers figures different from the real ones to please its shareholders or debtors. Therefore, although when we talk about the faithful and real image, we must differentiate between the real ‘real’ and what is supposed to be real according to accounting regulations.
For this reason, managerial accounting is used, encompassing other types of accounting, such as fiscal or financial. This area helps the active employees of the company when making decisions regarding future projects.
The main objective of managerial accounting
Managerial accountants focus on the detection and correction of irregularities or bad habits in the day-to-day management of companies. Thus, it prioritizes the best possible operation of the company that serves as a support to the rest of the departments. Consequently, it allows pursuing the objectives set in a coordinated manner.
It follows that management-type accounting works as an important control and strategic planning tool. It happens that in most of the cases, it stimulates a more efficient or optimal use of company resources.
Highlights of management accounting
In addition to the definition given, this accounting model has some relevant aspects, such as the following:
- It can be considered as an operational control tool, by integrating other fields or other practices that encompass the daily activity of an organization
- It translates into different amounts, economic magnitudes and business approaches developed in a business plan, facilitating the owner or administrator their strategic work
- It is also useful because the information collected is transmissible to third parties, such as banks, public administrations and other companies for various reasons.
- The consistency and regularity in the information found on the managerial accounting records of a company greatly prevent fraud or economic crimes. This is mandatory as frauds are more likely to happen in a company when it is in its development stage.
The cost accounting, also known as analytics, aims to create an information system that allows knowing the cost of production and goods and services. It is one of the most prominent parts of managerial accounting.
What is the purpose of cost accounting?
It determines the costs and allows planning and control of business management. It also helps in preparing budgets and information that allows evaluating yields and thus taking the necessary measures. All this contributes to the time of managing, planning and making decisions.
It is a type of accounting that is not regulated by law; that is, its presentation is not mandatory and is intended for internal company use. Due to its relevance, it is something that is done on a regular basis.
The financial accounting offers generic information of the company referred to the same in its entirety. All the financial accounting done in a company must be presented to the shareholders. To make it true and fair, it is audited by an external auditor (required by law) and is presented within a specific timeframe.
What is the purpose of Financial Accounting?
Provide information about the situation of the company to third parties that is, to natural or legal persons outside the organization. Not only will the internal staff have access to this data, but they will represent a real reflection for the outside world.
Through this accounting, financial statements on equity, financial situation and company’s standing are presented.
The financial statement presents the situation of the company in a certain moment (usually at December 31), that is, it is as if it were a photograph in which the figures of what happened during that period are presented. It can be submitted monthly, quarterly or annually.
Differences between Managerial Accounting and Financial Accounting
Now that we are clear about the types of accounting approaches that exist within a company and what each one is for let’s analyze their major differences.
- Managerial accounting is intended to calculate the cost of the products used and the budget to be spent on a project. In contrast, financial accounting focuses on obtaining financial statements that reflect equity and results.
- Managerial accounting is a source of information for the internal users of the company while the financial accounting is regulated by law and its presentation is mandatory
- Financial accounting shows a picture of what is happening and has happened in the company during a certain period, while managerial accounting prevents events that have not yet happened.
- The financial accounting shows exact data reflecting what has happened while the managerial accounting exposes approximate data to calculate the cost of a product with the influence of multiple variables. Therefore, the final figure may be inaccurate.
- Financial accounting shows measurable data in the currency of each country, while managerial accounting does not use standard units of measure.
- Financial accounting shows generic information of the company as a whole, while managerial accounting is broken down according to what users require.
In conclusion, both management accounting and financial accounting calculate and present the figures related to the company’s operations, but they differ from each other in multiple ways. They have different users, different legal status and even different purposes. Managerial accounting helps the company in estimating the cost of a future project considering the current budget and decide. In contrast, financial accounting helps the shareholders and other users understand the current financial position of the company.