1-3 Financial Accounting

Financial Accounting versus Management Accounting

  • Compare and contrast financial and managerial accounting.
  • What is difference between financial and managerial accounting?

Financial accounting reports are prepared for the use of external parties such as shareholders and creditors, whereas managerial accounting reports are prepared for managers inside the organization.

This contrast in basic orientation results in a number of major differences between financial and managerial accounting, even though both financial and managerial accounting often rely on the same underlying financial data. In addition to the to the differences in who the reports are prepared for, managerial and financial accounting also differ in their emphasis between the past and the future, in the type of data provided to users, and in several other ways. These differences are discussed in the following paragraphs.

Emphasis on the Future:

Since planning is such an important part of the manager's job, managerial accounting has a strong future orientation. In contrast, financial accounting primarily provides summaries of past financial transactions. These summaries may be useful in planning, but only to a point. The future is not simply a reflection of what has happened in the past. Changes are constantly taking place in economic conditions, and so on. All of these changes demand that the manager's planning be based in large part on estimates of what will happen rather than on summaries of what has already happened.

Relevance of Data:

Financial accounting data are expected to be objective and verifiable. However, for internal use the manager wants information that is relevant even if it is not completely objective or verifiable. By relevant, we mean appropriate for the problem at hand. For example, it is difficult to verify estimated sales volumes for a proposed new store at good Vibrations, Inc., but this is exactly the type of information that is most useful to...

In Business| What number did you have in mind?

Caterpillar has long been at the forefront of management accounting practice. When asked by a manager for the cost of something, accountants at caterpillar have been trained to ask "What are you going to use the cost element for?" One management accountant at Caterpillar explains: "we want to make sure the information is formatted and the right elements are included. Do you need a variable cost, do you need a fully burdened cost, do you need overhead applied, are you just talking about discretionary cost? The cost that they really need depends on the decision they are making."

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