The difference between financial and management accounting
Posted on June 15, 2022
If you have always thought that there was only one form of accounting, we have a little surprise for you. Two of the major types of accounting are financial, and management accounting (sometimes called managerial accounting), and they are certainly not the same thing,
While they both deal with numbers, they both serve very different purposes in business. Read on to find out what each one is, what purpose they serve, and how they can each help your business.
What is financial accounting?
Financial accounting is about collecting data for financial reports. It involves recording, summarising, and reporting the stream of transactions and economic activity resulting from business operations over a period of time.
Financial accountants use this data to prepare reports and statements distributed inside and outside the business to regulators, shareholders and the public. For small businesses, your annual financial statements and quarterly BAS are examples of financial accounting.
What is management accounting?
The main objective of managerial accounting is to provide useful information to help business managers make well-informed decisions. Management accountants collect, analyse and summarise information to assist managers with strategic planning, help them set realistic goals, and find efficiencies in their operations. It focuses on internal reporting and strategies for long term profitability.
Managerial accountants help business managers make decisions about everything from introducing new products to deciding whether to hire a new team member or outsource a service.
How do they differ?
So, financial accounting is all about being accurate and applying accounting standards correctly to provide factual information about business performance to regulators, investors and the public. Whereas management accounting is about planning and making predictions.
One of the most important differences between financial accounting and managerial accounting is their legal status. Management accounting information is intended to be used internally, so each business can create its own system and rules around managerial reports. In contrast, financial accounting reports are regulated because they are released to the public. Therefore, accountants must adhere to the accounting standards when preparing these financial statements, including income statements, balance sheets, and cash flow statements.
Summary of how managerial and financial accounting differ:
| Financial Accounting | Managerial Accounting |
|---|---|
| Used externally | Used internally |
| Looks at historical performance | Future focussed |
| Reports on business-wide performance | Reports on specific areas of interest |
| Information provided according to accounting standards | Managers choose what information they want to report on |
| Must use accurate numbers | Often uses estimates |
| Statements produced at the end of the accounting period | Reports are run throughout the month or on-demand |
Do small businesses use management accounting?
While it is certainly possible to run a business using only financial accounting, using managerial accounting allows you to plan for the future. Small businesses that thrive and grow into medium and big businesses use management accounting.
Consider the following example:
Imagine one of your biggest customers notifies you that they are closing down at the end of the month. You know that they buy a lot of stuff from you, so you need to get an idea of what financial impact that will have on your business and make a plan.
You run a report to determine what proportion of your income you derive from that customer. You also look at your financial statements from the last six months and see that income is down across the board.
The following day, you hold a staff planning meeting to create a plan to lift revenue. You estimate how much new revenue is needed to make up for the projected loss and decide to run some training sessions for the sales staff, broaden their sales territories and set some targets for new business. That’s managerial accounting.
Financial and managerial accounting are the perfect pair
Managerial accounting mainly deals with the future because it focuses on business performance and potential. It helps you make informed business decisions about strategy, problem-solving and how to make the business more profitable in the long run.
Your financial statements, produced using financial accounting, are essential to the management accounting process. Accurate financial statements help you make better business decisions.
Financial and managerial accounting at JSA
At JSA Accounting, our business advisory team is skilled in financial and management accounting. We provide a holistic service to our business customers to help their businesses thrive.
Talk to us if you’d like a business strategy based on data, not just gut feelings. We can help you move forwards with confidence.
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