Question

What are the similarities and differences between financial and managerial accounting? What are the key functions of managerial accounting? What important information does managerial accounting provide? What is the focus of managerial accounting versus financial accounting?

Answer 1

Similarities between Financial and Managerial Accounting

1. Both types of accounting systems are integral parts of total accounting information system used by Internal Management.

2. Economic transactions are evaluated and dealt in both types of accounting system.

3. The economic events are evaluated and quantified only in terms of rupees.

4. Both types of accounting systems deal with financial statements considering revenues, expenses, assets, liabilities, cash inflows and cash outflows.

5. Same kind of database, accounting principles and concepts are used for preparing financial statements and reporting under both system of accounting.

Differences between Financial and Managerial Accounting

BASIS	Financial Accounting	Managerial Accounting
REPORTING	It reports on the profitability of the entity.	It reports on specific problems and how to address them
SCOPE	It covers the entire transactions of the business	It covers particular area to be reported for example products, lines of product, customer base, geography and much more.
USERS	Documents to be distributed to internal and external users	Documents to be distributed specifically for internal users only. .
COMPLIANCE WITH STANDARDS	It has to comply with various International standards on accounting	It does not necessarily have to comply with any standards when information is specifically compiled for internal consumption.
ORIENTATION	Historic orientation as it uses financial results that the entity has already achieved with perfect precision. It is concerned with valuation of assets and liabilities.	Futuristic Orientation as it uses tools like budgets and forecasts using estimates, not proven and verifiable facts. Managerial accounting is not concerned with valuation.
FREQUENCY OF REPORTING	Under this system reporting is done at the end of an accounting period.	Under this system the reports are issued at a much more frequency as and when needed by managers.

The key functions of managerial accounting can be jotted down as the following-

• Specific analysis. By managerial accounting the amount of profit or cash inflow that an entity has generated from a specific kind of product, product line, customer, store, or geographical region can be determined.
• Valuation. Under the managerial accounting the direct costs allocated to the goods sold, consumed and manufactured along with allocation of overhead can be determined.
• Break even calculation. Break even refers to bifurcation of the total production costs between variable and fixed. The managers use this accounting for break even analysis of the product widely.
• Bottleneck study. Understanding what are the main constrains impacting the revenue structure of the entity can be studies by managerial accounting.
• Capital budgeting. Examining and evaluating specific projects and proposals can be done under managerial accounting.  

IMPORTANCE

1. Decision making:

   Decision can be assisted with the help of managerial accounting. Over viewing the managerial accounting shall aid in decision-making related to investing in projects, diversification , buy or sell, leasing assets or buying them and many more.

2. Forecasting Cash Flows: Estimating cash flows needed and the sources of funds can be evaluated with the help of managerial accounting. How much cost will the company incur in the future? Management accounting involves designing of budgets and trend charts which is helpful in forecasting.

3. Performance comparison:

   Business performance vary over the two consecutive periods. Even what was predicted and what is actually achieved is different. Managerial accounting can help in this analysis

Financial Accounting vs managerial accounting are done to gather a more comprehensive and microscopic view of financial transactions of the entity.