Managerial vs. Financial accounting

All types of financial and management accounting are streamlined systems that allow you to collect, summarize, register, and interpret information about the state of the company's property, resource allocation, financial result, and other aspects of the activity.

At the same time, in practice, management accounting is increasingly in demand as a single complex of technologies, in which information necessary for managing the company as a whole, its structural divisions, and also business segments is accumulated and analyzed. If we compare managerial vs. financial accounting, we find out that there are certain dependencies and interrelations between the two fields.

The interconnection of financial and managerial accounting and analysis is that many operations in managerial and financial accounting are reflected identically. Both systems use the same incoming information, but it is grouped differently, as it is intended for different purposes.

Management accounting was separated from financial accounting for objective reasons, in particular, under the influence of competition, a tendency to increase the scale of business. It combined partly accounting and partly operational accounting.

How is management accounting different from financial accounting?

The goals of using management and financial accounting information differ significantly.

Managerial Accounting

• The main goal of management accounting is to increase the efficiency of the company’s business. The information reflected in management accounts is usually available only to internal users.
• Managers use the management accounting system at various levels in the current work. This information, in particular, is necessary for making operational management decisions both for the company as a whole for a specific period and individual segments of activity, processes, products for different periods.

• Management accounting is regulated according to the vision of the company itself, which increases the efficiency and diversity of the use of financial and commercial information.

Financial accounting

• Financial accounting and reporting must meet certain standards that are established and controlled by various external institutions, for example, national legislation, the International Financial Reporting Council (IFRS).
• The users of financial statements can be not only top managers and founders of the company but also various lenders, investors, tax authorities, etc. These users are interested in assessing the financial position and financial results of the company (for example, investors and lenders can evaluate the financial stability, liquidity, creditworthiness of a company), but they do not have the opportunity to request additional reports from the company.
• Financial accounting provides verified information that cannot be adjusted if presented in the form of official reports. Government agencies can use the information to verify the organization’s payment discipline in taxes and fees. Financial accounting is intended primarily to carry out documentation, assessment, inventory, costing, etc.

The main differences include

Periodicity

External institutions regulate the timing of reporting in financial accounting, and management depends on the needs of internal users and is set by the company.

Characteristic indicators

All information in financial accounting is displayed in monetary terms, and management accounting can operate not only in monetary terms but also in other indicators. They can be quantitative, qualitative, probability-based.

The objectivity of the assessment

In financial accounting, most often, only objective data are used, and in managerial, along with actual indicators, estimated information is also used.

Information Requirements

In management accounting, special attention is paid to the completeness, efficiency, and form of reporting in financial accounting - to reliability and compliance with legal requirements and standards.

The relationship between financial and management accounting

The relationship between management and financial analysis is quite close and has common tasks

• Ensure the target financial result of the company
• Identify internal reserves to ensure the financial stability of the company
• To determine the feasibility of business operations
• To control the availability and movement of inventory items and other property
• Determine the feasibility of using resources

Analysis and purpose of using information

When analyzing data obtained using management or financial accounting, one can consider various aspects of the company's current, financial, or investment activities. For example, managerial accounting of the financial activities of an organization, in most cases, uses data comparison methods to find effective solutions to achieve the company's strategic goals.

Management tasks have a wider range

They may require in-depth detailing, quantitative, and qualitative characteristics. For example, with the help of management reports, the analysis of the activities of individual structural units, financial responsibility centers, the analysis of individual projects, forecasting future indicators, the study of deviation of actual data from the planned, budget adjustment, etc. can be carried out. Therefore, in management accounting, along with generally accepted principles of financial accounting, other approaches can be used.

For management accounting, the rules of financial accounting are selected for use, which the top management of the company considers the most useful for making decisions, regardless of whether they comply with generally accepted standards or legal requirements.

Financial accounting has a different approach

In financial accounting, there are unified approaches and clear methodological rules stipulated by various standards for the provision of information. This approach is necessary to make it convenient for a certain circle of users to use the information and to compare different companies among themselves.

The main principles of financial accounting, according to international financial reporting standards, are:

 

Accrual principle - events are reflected in the period when they occurred, regardless of cash flows.

The principle of business continuity - the company will continue to work shortly, and the management has neither plans nor the need to curtail activities.

Relevance - for forecasts and their confirmation

Reliability - completeness, and neutrality of information

Comparability - with past periods and between companies

Verifiability - for example, information can be verified by various independent experts.

Timeliness- information spans for a certain time.

Conclusion

The management and financial accounting are closely interrelated, but at the same time, they have different purposes of application and differences in data analysis. These classes of accounting are both imperative for a business to sustain and grow. Certification is also different for both of these types. The people certified in financial accounting get awarded by the designation of public Accountant whereas, people certified in managerial accounting get awarded by the designation of Management Accounting.