The Difference Between Managerial vs. Financial Accounting

Financial Accounting Definition

To determine the difference between managerial vs. Financial accounting, first let’s discuss what each method involves. Financial accounting helps those people outside of an organization or business understand what is going on financially within it. For example, an investor wants to know if a business is doing well financially before he contributes money to it. Creditors of a company need to know that the business is making a profit before they loan it any more money. Stockholders want to know if their investment will continue to pay off in the immediate future. All these people need information that is only provided through a business’ financial accounting records.

Managerial Accounting Definition

Managerial accounting helps those people inside an organization who operate as its day-to-day managers and in other leadership roles. These managers need information on a daily basis, not a monthly or annual basis, which is what financial accounting reports provide. Managerial accounting collects, analyzes, and provides daily accounting information reports to various entities within the organization to help it define, plan, and achieve its short and long-term goals.

Financial Accounting Reports

Likely, you are more familiar with the terms used to identify financial accounting reports than managerial ones: balance sheet, income statement, monthly financial statements, and monthly financial forecast reports, as well as year-end financial statements. If you operate a small business that employs very few employees, the financial accounting reports will more than likely suffice for your accounting needs.

When it comes to managerial vs. financial accounting, your lender will need these financial accounting reports in order to help you obtain loans you may need for your company initially, as well as during the businesses continued operation. However, if you sell items that must be produced by your company through the use of machinery, you could benefit from managerial accounting too. Large companies need financial accounting reports as well, even if they also use managerial accounting reports.

Managerial Accounting Reports

Managerial reports are prepared to aid managers in revealing information about the company’s business progress during a set period of time. For example, knowing exactly how much of an item the business has in inventory can aid a manager in staying appropriately stocked. Running out of a high sales item is bad business. Managers need to be able to make sure inventory matches customer demand. Orders received reports and inventory reports help them to do that.

Likewise, order backlog reports allows a manager to see just how many overtime hours–or new hires–will be needed to help the company meet customer demands more promptly. Managerial reports also do this.

Significant Difference

A significant difference between managerial vs. financial accounting revolves around legal requirements. If a business operates on the selling shares for its company, it is mandatory that financial statements be prepared per the Securities and Exchange Commission (SEC). However, managerial accounting reports are not mandated.

Financial accounting reports have to be prepared and submitted annually to tax authorities, and they have to be prepared based on GAAP (generally accepted accounting principals). This is not something that a person can get around. It is a legal requirement, as it is an effort to prevent fraudulent information from being presented about any business’ financial picture. Managerial accounting, however, is a choice. It can be done or not done, based upon the preference of the company.