Which of the following is generated through management accounting rather than financial accounting?

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What is the Difference Between Financial and Managerial Accounting?

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3. What is the Difference Between Financial and Managerial Accounting?

December 27, 2019

The difference between financial and managerial accounting is that financial accounting is the collection of accounting data to create financial statements, while managerial accounting is the internal processing used to account for business transactions.

The certification for each of these types of accounting is different as well. People who have been trained in financial accounting have a Certified Public Accountant designation, while those with a Certified Management Accountant designation are trained in managerial accounting.

The perception that more training is required for financial accounting might be reflected in the higher pay rates of financial accountants over managerial accountants.

The following categories also show the differences between financial and managerial accounting.

SYSTEMS

Financial accounting only cares about generating a profit and not the overall system of how the company works. Conversely, managerial accounting looks for bottleneck operations and examines various ways to enhance profits by eliminating bottleneck issues.

REPORTING FOCUS

Financial accounting is focused on creating financial statements to be shared internal and external stakeholders and the public. Managerial accounting focuses on operational reporting to be shared within a company.

AGGREGATION

Financial accounting looks at the entire business while managerial accounting reports at a more detailed level. Managerial accounting focuses on detailed reports like profits by product, product line, customer and geographic region.

EFFICIENCY

A business’ profitability and efficiency are reported through financial accounting. Managerial accounting reports on what is causing a problem and how to fix that problem.

TIMING

Financial statements are due at the end of an accounting period, while managerial reports may be issued more frequently, to provide managers with relevant information they can act on immediately.

PROVEN INFORMATION

Considerable precision is needed to prove that financial records are correct. Financial accounting relies on this accurate data for reporting, while managerial accounting frequently deals with estimates opposed to proven facts.

STANDARDS

When managerial accounting is made for internal consumption there is no set of standards to compile that information. On the other hand, financial accounting must follow various accounting standards.

TIME PERIOD

Financial accounting looks to the past to examine financial results that have already been achieved, so it is historically focused. Managerial accounting looks to the future with forecasting.

VALUATION

Financial accounting is concerned with knowing the proper value of a company’s assets and liabilities. Managerial accounting is only concerned with the value these items have on a company’s productivity.

This article will also discuss:

Does Managerial Accounting Follow GAAP?

NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.

Does Managerial Accounting Follow GAAP?

Financial accounting reports are distributed inside and outside of a business and are governed by GAAP and IFRS. The external publication of financial statement makes it very necessary to follow regulation to provide correct information.

Managerial accounting reports are shared internally only and are, therefore, not subject to such rules and regulations and are not required by laws to follow any accounting standard.

RELATED ARTICLES

Whether or not you plan to major in Accounting, every student who plans to work in business after graduation needs to have an understanding of how companies operate financially, especially if you plan to hold a position of leadership in the future.

For example, let’s say you’re in charge of running the marketing department for your company. While you may think marketing has nothing to do with accounting, if you’re in charge of the department, you’ll need to know how to structure your budget based on past spending history and future predictions, as well as have the ability to read financial statements. Understanding accounting will also help you analyze your profits and make informed strategic business plans.

“Regardless of your chosen career, it is critical to have a firm understanding of introductory accounting to do well in any business,” says Kerri-Ann Sanderson, assistant professor of Accounting at Bentley University. “Especially in today’s environment, if you want to be a leader and differentiate yourself from the rest, you must master the business aspects of your organization.”

The two introductory accounting courses found in most business programs are financial accounting and management accounting. While both topics make up the foundational pillars of accounting, there are key differences between the two that you should know.

What is management accounting?

Management accounting, also referred to as managerial accounting, is used by managers and directors to make decisions regarding the daily operations of a company. A distinguishing feature of managerial accounting is that it is not based on past performance, but on current and future trends. For example, determining how much your business should charge for a new product and analyzing how much revenue a future product line is capable of generating are both examples of business problems within the field of managerial accounting. So, too, is deciding when to replace the computers in your offices. Since business leaders constantly need to make operational decisions in a short amount of time, management accounting must rely on predicting markets and future trends.

What is financial accounting?

Financial accounting is used to present the financial health of a company to external stakeholders. This allows the board of directors, stockholders, potential investors, creditors and financial institutions to see how the company has performed during a specific period of time in the past. These reports are filed on an annual basis. If a business is considered a publicly-traded company on the stock market, the reports must be made part of the public record. In a financial accounting course, students learn how to prepare, read and analyze financial statements.

What is the difference between the two?

There are two primary differences between financial and management accounting. The first difference is that management accounting is presented to a company’s internal community, while financial accounting is prepared for an external audience. Even though financial accounting is of great importance to current and potential investors, management accounting is necessary for managers to make current and future financial decisions for their business. The second difference is that financial accounting is exact and must adhere to Generally Accepted Accounting Principles (GAAP), while management accounting can be based off a guess or estimate since most managers do not have time to get exact numbers by the time a decision needs to be made.

An integrated approach to learning

As an undergraduate or graduate business student, you will likely be required to take one course in financial accounting and one course in management accounting before you complete your degree. At Bentley, the general business curriculum for undergraduate students takes a less traditional approach. Instead of completing two separate courses in financial and management accounting, students are required to take two courses that integrate both fields.

“In business, finance and accounting are a very integrated set of concepts, so we present them to students in this way,” explains Sanderson. “At Bentley, we immerse students in the effective implementation of these concepts in business while leveraging the power of data analytics using real-world applications.”

If you decide to declare your major in Accounting or Corporate Finance and Accounting at Bentley, you’ll then go on to take two intermediate courses that dig deeper into the topics of managerial and financial accounting. You’ll also be required to take a course in cost accounting, which provides the next level of detail in managerial accounting. This course will provide you with comprehensive coverage of the principles involved in determining the cost of product or service.

Prepare for your degree with Bentley University

As a graduate of Bentley, you will benefit from the university’s long-standing reputation for excellence in accounting instruction at both the undergraduate and graduate level. In 2021, College Factual, an online portal designed to assist students in selecting a college, acknowledged the high caliber of Bentley’s undergraduate accounting program by ranking it #1 in the nation. Bentley’s Master of Science in Accounting program was ranked #35 by Eduniversal for accounting and auditing graduate programs in North America. Eduniversal bases its rankings on three main criteria: program reputation, the salary of first employment and student satisfaction. 

As a result of Bentley’s reputation, the university is repeatedly sought out by the nation’s top accounting firms. “All of the big four accounting firms (Deloitte, PwC, EY and KPMG) have Bentley University on their list of key recruiting schools,” shares Sanderson.

In addition, Bentley’s faculty, Pulsifer Career Development Center and alumni network have extensive connections within these organizations and other accounting firms across the country that you can take advantage of during your degree program.

Learn more about Bentley's undergraduate and graduate Accounting programs. 

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