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Comparing Financial & Managerial Accounting

Lesson Transcript
Instructor: Christian George

Christian has a PhD in Business Management and an MA in Accounting & Financial Management

Financial accounting accumulates information on business with external environments, whereas managerial accounting emphasizes internal organizational needs. Compare these two types of accounting to understand how each is applied. Updated: 12/14/2021

Financial vs. Managerial Accounting

'Happy Birthday Greg!' Uncle Frank walks across the room and hands me an envelope. It feels like a birthday card. Hopefully it'll have something green in it. 'Now that you are grown up, Greg, I figured you could use something for your birthday that will pay off in the long run.'

I open it and pull out a piece of paper and read. It says 'Stock Certificate' at the top in fancy letters. I read through the rest of the paper and discover that it's stock in the company that Uncle Frank works at. I know he's a manager there, and that the company makes electronic components for computers.

'One thing you'll have to learn, Greg, is that our company puts out financial statements and other public information that'll be important for you to pay attention to. Learn how to read them and use them to make good decisions regarding this stock, and any more you might want to get. Depending on the performance of our company, your stock value can increase or decrease. It all depends on sales and other financial information.'

'Uncle Frank, is there any other kinds of financial information that you could get me to help me make decisions about selling or buying this stock?'

'Unfortunately, no. Some of the financial information is confidential and used only by the company to make decisions. We can't release it to the public. It would compromise our operations.'

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Financial Accounting

In this example, Greg was introduced to the two types of accounting through the gift from Uncle Frank. First of all, he learned that some financial information of a company is provided to external users. The process of collecting, recording and organizing this financial information is called financial accounting. This form of accounting classifies and records business events and transactions into external financial statements. Financial statements include the Income Statement, Balance Sheet, and Cash Flow Statement.

Financial accounting information is used by external persons, such as shareholders and other investors, to determine the financial health of the company. The preparation of this information is determined under the guidelines of regulatory requirements, such as Generally Accepted Accounting Principles (GAAP) or the International Financial Reporting Standards (IFRS). This information must be uniform for all companies, so that the public has a reliable assumption that the financial information that they are reading is accurate and follows guidelines that everyone has to follow.

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