Accounting, a term that whenever it comes to your mind, your brain imagines a person playing with dollars or money and your brain is right. Accountants, no matter if he is a Financial Accountant or Managerial Accountant, he plays with money. But then why there are two accountant types then?
So, if you are an entrepreneur or a business owner or even a business student you might be confused because as a business owner or entrepreneur if you hire a Financial Accountant, he cannot predict the future and if you hire a Managerial Accountant, he cannot present the historical data of your company to the public. Also, if you are a student, you will be confused that why are you studying Financial accounting and Managerial accounting in your BBA degree program. Right?
This question account for you to look for the difference between managerial vs financial accounting and if there is a difference between the two, then which one is better? So let us dive into the detailed analysis between them.
In business, you may look at all the bigger companies around the world use both of the accounting methods and the reason simple. They both are different, and they both provide different information to a company.
Financial Accounting refers to an accounting type that tells you about the past performance of your company. How your company performed last year or for the last decade or so; This includes preparing Balance Sheet, Income Statement, Cash flow statement, and many other statements to analyze the performance the company has shown.
Managerial Accounting refers to an accounting type that tells how your strategies will perform in the future or what will be the impact of those strategies on profits. Like if you are going for a price cut on your one product line, how much will it impact that product line and how much will it impact your overall business profits.
Let us breakdown the difference between the two accounting methods for your clear understanding:
Accumulation of Data: Accumulation means collecting data. Financial accounting accumulates entire business activities. They are not specific to a certain product or service but the whole business; This is why whenever you see a financial report of a public listed company, you cannot segregate sales of individual SKUs (Stock Keeping Unit). On the other hand, Managerial accounting is more of individualistic reporting. If a manager wishes to know the sales of a certain SKU, he can see by looking at the sales of that one SKU.
Disclosure: When we talk about disclosures, companies who are publically listed, they have to disclose the financial reports like Balance sheets, income statements, cash flow statements, and many more. They are legally obliged to do it. However, no company is legally obliged to disclose their managerial reports. However, if a company wants, it can disclose the information, but this will count as voluntary disclosures.
Purpose of reports: The purpose of making financial reports is to look at how the company has performed in the past. Should we invest in the company or not. Should a bank give credit to the company or not. It is the source of looking at the past of a company. Managerial accounting, on the other hand, is created to look at the future how our strategies might work out. What can be our profits? Basically, managerial accounting determines that how will our company and our strategy perform next year.
Reporting Standards: Since financial reports get published to the public, they must be in a format that can be understood and is uniformed so that a common person can easily compare two companies. How they have performed and what should he do? Hence a financial accountant has to follow a standard that is accepted at least in his own country. Like in Pakistan, IFRS (International Financial Reporting Standard) is used; however, IAS (International Accounting Standard) applies in different parts of the world as well. Hence, a company cannot issue its financial reports unless it is according to any of the one globally accepted financial reporting standards.
Managerial reporting, on the other hand, requires no standard to follow. Because the main purpose of the report is to use it for internal management hence a standard that a company has can be the standard a managerial accountant needs to follow for the reporting.
In financial reporting, there are mainly four basic Accounting tools that analyze company performance.
1) Balance sheet: This is to look at the company’s end of the year Assets, Liabilities, Capital and retained earnings.
2) Income Statement: This is to see how much profit a company has made after paying the interests, dividends, and taxes.
3) Cash Flow statements: This is to see how cash has flown in the past year. Does the company have any surplus cash or where the company has used the cash more?
4) Stock holder’s equity statement: This is to see the change in equity of the company’s stockholders.
Managerial accounting has no specific or listed accounting tools. However, management accounting can have the following tools like:
1) Dynamic income statement: This is an income statement that predicts the future and makes a range of sales for the coming year.
2) Costing statement: This is to see how much profit a company is generating by an SKU and to see how much it will make if we increase or decrease the price.
3) Combined costing statement: this is to see how much profit a company will generate by the complete product line.
So in financial accounting, you have defined a set of accounting tools, but in managerial accounting, you have to make your tools as per the condition given to you.
Timing of reporting: A financial report has a particular time on which it has to be published. Like some companies publish them annually, some biannually and one annual and some quarterly, biannually and annually. But they have to decide who they will publish but have to publish them on those dates. But managerial reports are not time-bound.
So, which is better?
Well, it depends. You cannot rule out one accounting by another. If you want to know how your company has performed or what your current valuation is, you have to make financial reporting. You cannot make managerial reports because they are not for that purpose. The same goes for managerial reports as well.
In the business world, there is nothing over looped. Everything has a reason. A business owner or an entrepreneur will have to deploy both financial accounting and managerial accounting. A student has to learn both accounting methods. The reason is they both are for different purposes. Financial accounting is to look and analyze the past data; however, managerial accounting looks at the future. Hence no one is better, and both have their importance for a business.