When it comes to accounting , both financial and managerial accounting , many people think only of the records, notes and spreadsheets that a company needs to have to be accountable to the government. Anyone who thinks like that is wrong.
Accounting is the science that analyzes movements in a company’s equity . The result of this analysis is translated into information and reports , which are delivered to those interested in knowing about the progress of the business .
This means that accounting is not limited to what needs to be presented externally – to the government, for example. It also has a strategic role internally to the organization itself, by revealing the performance of the company and help in making decisions.
Therefore, this area can have two branches: financial accounting (external) and management accounting (internal). Do you want to better understand what each one is and what are the differences between them? So, follow this post now:
What is financial accounting ?
The financial accounting is geared for external purposes. The accounting information is presented to agents outside the company , for example:
- Financial institutions;
● Investors ;
● Suppliers .
Each of these agents uses information for its purpose, such as government oversight or performance analysis by investors and shareholders . However, all reports follow a standard, which is regulated by legal standards and class entities, so that the accounting data is transparent and reliable.
The financial accounting is mainly based on three reports: Balance Sheet , Statement of Results Exercise ( DRE ) and Cash Flow Statement ( DFC ). They reveal to the interested parties the health of the company in economic , financial and patrimonial terms .
What is management accounting ?
Also called management accounting (in English Management Accounting ), management accounting is focused on the company . Therefore, accounting information is provided to internal agents, such as:
- Managers ;
● Partners ;
● Collaborators .
Unlike financial accounting , reports do not have to follow legal requirements, as their use will be strictly internal.
So, the format and the periodicity in which they are prepared follow only the objectives of the managers , who need to understand and interpret the information to help in making strategic decisions for the company .
Therefore, management accounting is not limited to the calculation and recording of accounting data . It is also responsible for directing future strategies and improving, for example, cost management , pricing and the use of financial resources .
What are the differences between financial accounting and management accounting ?
Although there is a separation between financial and managerial accounting , accounting information that is presented externally can also be used for internal purposes. Therefore, there is an intersection between them, not a complete separation.
Despite this, there are clear differences between financial accounting and the other. Now let’s see the main ones:
This is the big difference: financial accounting is turned outwards, with the objective of providing information to external agents; since the management is turned inward, arming managers and employees to reports that help improve the performance of the company .
Legal requirements and accounting principles
The financial accounting need to follow legal requirements and comply with the principles of accounting to convey reliability. Meanwhile, management accounting does not need to follow any rules – everything will depend on the preference of the managers of each company . Despite this, it is common to follow the same precepts of financial accounting .
While financial accounting is focused on the past – as it presents movements within a specific period of time -, management only uses the accounting history to project the company’s future , which is its main role. For that, the reports must be clear and objective to support the managers ‘ decisions .
The financial accounting is mandatory. Information on the equity situation , cash flow and results for the year must be published and audited. Already the management accounting is only an administrative tool. Its existence depends on the needs of each company .
The Balance Sheet , DRE and DFC reports must be submitted annually, in accordance with the law. It is common, however, that they are also prepared monthly for administrative purposes . The management accounting , then, does not have a mandatory basis, although companies usually adopt monthly controls.
There are some differences as to the separation between financial and managerial accounting . For some, the second is just a continuation of the first, since it uses the same information, however, in other formats and for other purposes. For others, however, there is a clear separation between financial and managerial accounting , based on the differences we present in this post.
More important is to realize the importance of each area for the company , regardless of whether they are seen as separate or not. The financial accounting is essential to keep the demonstrations days, and management helps the organization to create better strategies and make better decisions.