Managerial Accounting vs. Financial Accounting

Not all accounting systems are created alike, and a well-rounded organization will be able to tackle both financial and managerial accounting with ease. Although they both deal with numbers and figures, there are quite a few differences between managerial accounting vs. financial accounting. While managerial accounting is used internally, financial accounting focuses on crafting outward-facing financial statements for external stakeholders. We’ll cover these differences – and similarities – in this guide.

What is managerial accounting?

Managerial accountants produce documents that can be used internally to maximize a business’s efficiency. For example, they track the use of company resources like equipment, labor, and raw materials over time along with sales and revenue. These internal financial documents can be used to create budgets and set sales goals. Managerial accounting tends to focus on the future, assessing business performance over time by devising strategies for profit and growth. With the use of financial statements, managerial accountants solve problems and create forecasts.

What is financial accounting?

Financial accounting involves the process of producing a business’s official documents. What is a financial account in this context? These include cash flow statements, income statements and balance sheets that will be viewed by external investors and stakeholders. Industry regulators and agencies like the Securities and Exchange Commission also view the work of financial accountants. As a result, these financial statements must adhere to all regulatory guidelines and the Generally Accepted Accounting Principles (GAAP).

Financial accounting also involves all the smaller steps needed to complete these financial statements, including everyday tasks like invoicing, tracking accounts receivables, and creating accounting journal entries.

Similarities between financial accounting and managerial accounting

There are several similarities between financial accounting and managerial accounting. Both rely on the same source figures, requiring accurate recordkeeping of transactions, revenues, and expenses. Managerial accountants will use these figures to create internal budgets and forecasts, while financial accountants will use them to comply with all external regulations. Both types of accounting also use similar strategies to gather and analyze data, looking at changes in sales and expenses over time.

Differences between financial accounting and managerial accounting

While there are similarities to be aware of, there are also several key differences when it comes to managerial accounting vs. financial accounting.

Managerial accounting:

• Is used internally

• Looks at operational as well as financial data

• Looks at the future

• Is used by managers to make decisions

• Is used to draw up departmental reports, inventory reports, and sales reports

Financial accounting:

• Is used externally

• Looks at historic performance data

• Looks solely at financial data

• Is used by the full company including external stakeholders

• Must comply with GAAP standards

• Is used to create the balance sheet, income statement, and cash flow statement

With different reporting focuses and goals, the worlds of managerial and financial accounting are quite different. Both use the same source data, but managerial accountants look to the future while financial accountants analyze the past.

Which type of accounting is right for you?

It’s not an either/or situation. Ultimately, businesses will need to use both types of accounting. The choice will depend on the task at hand – if you’re trying to draw up next year’s budget, you would use managerial accounting. It’s best when you want to take a deep dive into your business’s growth potential with forecasting and analysis. However, if you’re creating your income statement, you would use financial accounting. This is better suited to analyzing historical performance and providing detailed, relevant information to outside regulators like the Financial Accounting Standards Board (FASB).

Accounting software makes it easy to tackle both types of accounting from a central dashboard, so you can use accurate data both with recordkeeping and future forecasts. GoCardless partners with accounting software companies, including big names like Xero and Salesforce, ensuring a joined-up payments and accounting workflow.

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