Differences Between Managerial Accounting and Financial Accounting Essay
Managerial Accounting What Does Managerial Accounting Mean? – The process of identifying, measuring, analyzing, interpreting, and communicating information for the pursuit of an organization’s goals. This is also known as “cost accounting. ” – Managerial accounting is used primarily by those within a company or organization. Reports can be generated for any period of time such as daily, weekly or monthly. Reports are considered to be “future looking” and have forecasting value to those within the company.
Financial Accounting What Does Financial Accounting Mean? – Reporting of the financial position and performance of a firm through financial statements issued to external users on a periodic basis. – Financial accounting is used primarily by those outside of a company or organization. Financial reports are usually created for a set period of time, such as a fiscal year or period. Financial reports are historically factual and have predictive value to those who wish to make financial decisions or investments in a company.
Differences between managerial accounting and financial accounting The key difference between financial and managerial accounting is that financial accounting is aimed at providing information to parties outside the organization, whereas managerial accounting information is aimed at helping managers within the organization make decisions * Confidentiality and type of information Management Accounting is the branch of Accounting that deals primarily with confidential financial reports for the exclusive use of top management ithin an organization. These reports are prepared utilizing scientific and statistical methods to arrive at certain monetary values which are then used for decision making. Such reports may include: • Sales Forecasting reports • Budget analysis and comparative analysis • Feasibility studies • Merger and consolidation reports Financial Accounting, on the other hand, concentrates on the production of financial reports, including the basic reporting requirements of profitability, liquidity, solvency and stability.
Reports of these nature can be accessed by internal and external users such as the shareholders, the banks and the creditors. * Regulation and standardization While financial accountants follow Generally Accepted Accounting Principles (GAAP) set by professional bodies in each country, managerial accountants make use of procedures and processes that are not regulated by a standard-setting bodies. However, multinational companies prefer to employ managerial accountants who have passed the Certified Management Accountant (CMA) certification.
The CMA is an examination given by the Institute of Management Accountant, a professional organization of Accounting professionals. This certification is different and distinct from the CPA or Chartered Accountant certificate. * Time Period Managerial Accounting provides top management with reports that are future-oriented, while Financial Accounting provides reports based on historical information. However, Management accountants based their reports on historical values, while employing statistical methods to arrive at future values.
There is no time span for producing managerial accounting statements but financial accounting statements are generally required to be produced for the period of 12 previous months. * Other differences • There is no legal requirement for an organization to use management accounting but publicly-traded firms (limited companies or incorporated companies whose shares are bought and sold on a open market) must, by law, prepare financial account statements. • In management accounting systems there is no requirement for an independent external review but financial accounting annual statements must be audited by an independent CPA firm. In management accounting systems, management may be concerned about how reports will affect employees behavior whereas management concerns are about the adequacy of disclosure in financial statements. (BAC) | | | | | |Financial Accounting |Managerial Accounting | | |External persons who make financial decisions |Managers who plan for and control an organization| |1.
Users | | | | | | | | | | | | |Historical perspective |Future emphasis |2. Time focus | | | | | | | | |Emphasis on verifiability |Emphasis on relevance for planning and control | |3.
Verifiability | | | |versus relevance | | | | | | | | |Emphasis on precision |Emphasis on timeliness | |4.
Precision versus | | | |timeliness | | | | | | | | |Primary focus is on the whole organization |Focuses on segments of an organization | |5.
Subject | | | | | | | | | | | | |Must follow GAAP and prescribed formats |Need not follow GAAP or any prescribed format | |6.
Requirements | | | | | | | | | | | Meaning of Cost The amount paid, charged, or engaged to be paid, for anything bought or taken in barter; charge; expense; hence, whatever, as labor, self-denial, suffering, etc. , is requisite to secure benefit. – Standard cost is the estimated cost of material, labor, overheads and other costs for each unit of production or purchase in a given accounting period. It is used as the benchmark against which cost variances and financial performance are measured, the valuation for inventory and a basis for pricing. Types of Cost
Costs are expenses the company has to pay during the production of its product. There are 3 main types of costs, these are: fixed costs, variable costs, and semi-variable costs: • Fixed costs: Costs that don’t change over a period of time and don’t vary with output. E. g. salaries, rent, tax, insurance, heating and lighting. Fixed costs can also be called indirect costs as they are not directly associated with the final product. Fixed costs have to be paid even if the company is not producing any goods. Variable costs: Costs that vary directly with output so when output increases, variable costs also increase. E. g. raw materials, electricity. Variable costs can also be called direct costs as they are directly associated with production. • Semi-variable costs: These costs have fixed and variable elements. E. g. a person working for the company may have a fixed salary but may also earn commission on sales. Total costs are calculated by adding together fixed, variable and semi-variable costs.