Audience
The main difference between managerial and financial accounting is the user of the data. Managerial accounting provides financial information internally to executives, managers and employees. On the other hand, financial accounting focuses on external users such as lenders, investors and regulatory agencies. The purpose and the way the financial statements are prepared are dependent on who uses the information. The reports for internal users will be more flexible and focus on a specific purpose. Meanwhile, the data for external users require accountants to follow specific standards and rules.
It's important to note that financial accounting reports can be used by internal users; however, managerial accounting reports are typically not released to the public.
Purpose
The purpose of each type of accounting is also different and important to note. Managerial accounting helps management create and evaluate long and short term goals. Accountants will also provide financial data to help analyze the operations of the business. Financial accounting, on the other hand, provides an overview of the financial health of a business at a certain point in time such as quarterly or at the end of the year.
Statement Preparation
Now, let's discuss how statement preparation comes into play in each of these types of accounting. Financial accounting focuses on the past and historical data, while managerial accounting provides information to operate the business and plan for the future. As a result, managerial accounting reports are created on an as-needed basis. For example, if the marketing department plans on implementing a major advertising campaign and believes sales will increase by 10%, your department will be asked to run those numbers and explain the increase in sales and associated increases in expenses. Your team of accountants will analyze this information to determine if the advertising campaign will be profitable and, ultimately, if we should move forward with the project.
Since external users rely on financial accounting reports, there are many important rules and regulations that must be followed to create these reports. For instance, generally accepted accounting principles (or GAAP) provide standards on how U.S. companies should prepare and report financial statements. If you're an investor and reviewing several different companies, GAAP provides some assurance you're comparing apples to apples.
Note that criminal penalties can be imposed if GAAP is not followed, since entities and people outside the company use this information to make decisions. You've heard of companies that have fraudulently reported more income than they have received, which is called cooking the books. These executives are held liable and can go to prison.
Another important set of standards to note is the International Financial Reporting Standards (or IFRS), which provide global standards of how reports should be prepared. If a U.S. investor is interested in an international company, she can have confidence if the company reports they are using are IFRS.
Lesson Summary
With managerial accounting, accounting reports are prepared for internal users and provide valuable information to set goals and manage the business. Since the company relies on this information, there are not any regulations or standards that must be followed in preparation. The reports can be customized to fit the user's request.
With financial accounting, accounting reports must follow GAAP and IFRS standards, since the primary users are external. For instance, investors rely on the information to make decisions on investing in the company, lenders review these financials to determine if they should loan the company money and regulatory agencies ensure company financials are accurate to increase public confidence.
