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Financial accounting is defined as measuring and recording business transactions and
providing financial statements that are based on generally accepted accounting principles.
It focuses on external reporting. The purpose of financial accounting it to aid accounts in
their function of overseeing an organizations financial assets. The central outputs of
financial accounting are audited financial statements such as balance sheets and income
statements. Financial accounting is geared toward providing information to parties outside
the firm, for example prospective shareholders.
By contrast, managerial account which measures and reports financial and non-financial
information tat helps managers make decisions to abide by the goals of an organization. It
focuses on internal reporting. The tools used by managerial accountants to meet their goal
of decision support are such things as budgets, activity-based costing and financial
planning. Managerial account is designed for internal use by firm managers. Cost
accounting is a subset of the more inclusive area of managerial accounting. Cost
accounting deals with the how to of determining the cost of a cost object. A cost object is
simply anything, be it a product, service, responsibility center, that the company chooses to
determine the cost of.
Managerial accounting emphasizes the measurement, analysis, communication, and
control of financial and non-financial accounting information. The organization that aids
accounts with this task is the Institute of Management Accountants (IMA). The IMA is a
leading organization dedicated to empower management accounting and finance
professionals to help business performance. IMA goal is to enable company to more
effectively engage with and enhance the management accountant and finance professionals
performance.
Below is a chart identifying Managerial and Financial Accounting differences.
Item Management Accounting Financial Accounting
1. Necessity Optional Required
2. Underlying rules None other than cost/benefit GAAP
3. Underlying structure Varies by needs A = L + OE
4. Primary users Internal External
5. Time orientation Future Past
6. Content Mix of monetary and non-monetary Mostly monetary
7. Precision Mostly approximations Less approximations
8. Frequency As needed Quarterly and annual
9. Timeliness Good enough and on time After the fact
10. Entity Responsibility/cost center Enterprise
Neither financial nor managerial accounting is a replacement of the other. They each have
an individual purpose in the accounting function. Financial reports are meantto give capital
providers a way to assess how well the capital is being used within a company; they are
backward-looking, based on historical accounting data and provide a broad view of the
organizations performance. In contrast managerial accounting focuses on decision making
support and is forward-looking. Given the needs of its types of operational managers, there
