What Is the Difference Between Financial Accounting and Managerial Accounting?

Although developed nearly a century apart, managerial and financial accounting go hand in hand. Business professionals need to understand both types of accounting components to anticipate real-world entrepreneurial challenges today and in the future.

The La Salle University MBA General Online program includes a foundation course, MBA 601: Financial Accounting, as well as a core course titled MBA 691: Managerial Accounting for Decision Making. These two systems differ, as they have unique histories and purposes. However, they are often used interchangeably to describe tasks that are similar within each discipline.

The financial accounting course covers basic accounting language and concepts, recording financial transactions, preparing financial statements, reporting and analyzing operating income, operating assets and owner financing. The managerial course examines the problems of cost measurement, planning, coordination, control and performance evaluation.

A Quick Background

Managerial accounting, introduced in the late 1800s, initially provided the information needed to produce goods like steel and textile. It is now focused on operating segments, delivering useful information for strategic planning and eliminating bottleneck issues that hamper profitability. It is geared toward helping plan the financial future of a business. Managerial accounting provides managers with operation metrics  that help them make informed economic decisions so that they can improve operational efficiency and plan business growth strategies.

Developed in the early 1900s, financial accounting is primarily used to develop reports informing constituents outside of a company of its business performance and financial status. Public companies are required to provide financial statements to these entities. The information delivered through financial reporting is regulated by the Securities and Exchange Commission (SEC) through rules known as generally accepted accounting principles (GAAP).

Differences in Focus, Reporting, Timing and Constituents

Managerial reports include daily and weekly budgeting reports as well as proprietary reports detailing operational efficiencies. These highly detailed, technical reports often include estimates and projections, in addition to historical and accurate data. Managerial accountants use this data to support company expenditures and track deviations from budgets and actual performance results.

Financial reports provide quarterly and yearly financial data detailing profitability and efficiency to parties outside of an organization. Unlike managerial reports, financial reporting focuses on proven information and accurate data that is aggregated, concise and generalized rather than specific and technical. Constituents include the media, shareholders, investors, tax professionals and creditors. This information is used to support public investing and lending decisions.

What Is Involved in Managerial Accounting?

The process of managerial accounting includes analyzing scenarios, interpreting data, identifying needs and communicating findings. It is applied in several ways, including the following:

  • Trend analysis and forecasting: investigating trend lines and variances to calculate and project what will happen in the future. Examples include reviewing sales volumes, customer tendencies, historical pricing and other financial information.
  • Capital budgeting: evaluating metrics including net present value and internal rate of return to aid decision-making about expenditures to consider. This application involves reviewing proposals, determining what products and services to offer, and evaluating financing methods.
  • Product costing and valuation: calculating and allocating overhead charges like monthly rent and utilities to determine production's true costs. This includes applying direct costs attributed to the production of goods and services, such as raw materials, to assess the costs of inventory and goods sold.

What Is Involved in Financial Accounting?

Generally accepted accounting principles (GAAP) form the basis of reports, which pull from high-level data, invoices, tracking accounts and receivable balances. Common financial accounting reports include:

  • Income statements: Also known as the profit and loss statement, this report includes the company's revenues and expenses during a reporting period. This provides insights into a company's operations, management efficiency and under- and over-performing lines of business relative to the market.
  • Balance sheet: This report shows assets and liabilities, as well as shareholder equity for a reporting period. It also shows how a business finances its assets.
  • Cash flow statement: This details cash inflows and outflows for a reporting period. It provides a measure of how well a company manages and generates cash to fund operating expenses and pay debt obligations.

As these applications make clear, managerial accounting is primarily forward-looking in order to solve problems or achieve goals. In contrast, financial accounting mainly looks back to report on facts and trends. Both systems require extensive training, which is one of the career benefits of enrolling in a higher education MBA program.

Learn more about the La Salle University online Master of Business Administration program.


Sources:

Chron: Management Accounting vs. Financial Accounting

Investopedia:
Managerial Accounting
When Is Managerial Accounting Appropriate?
How Do the Balance Sheet and Cash Flow Statement Differ?


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