Managerial and financial accounting are vital components of modern business but they both contribute to overall operations in different ways. Accounting serves the purpose of determining the operations of a business in regards to future projections, past performances, and current requirements. Managerial accounting has its links in cost management, cost accounting, investment management, and activity management.
Nonetheless, all businesses utilize accounting when they seek to carry out various executions in their daily operations. Therefore, both managerial and financial accounting are of interest to different audiences. For example, although investors are not part of daily business operations, they are interested in knowing how their investment portfolios are performing. On the other hand, managers require all the relevant information to be on their fingertips so that they can make quick and relevant decisions.
Managerial and financial accounting are both components of the management accounting whereby professionals in this area are recognized as Certified Management Accountants (CMA). Management accounting is a broad accounting discipline that consists of financial accounting, tax accounting, internal auditing, and managerial accounting. Therefore, financial and managerial accounting both provide different career paths but in general terms the former is mostly concerned with the production of financial statements while the latter deals with the internal activities of an organization. This essay is an exploration of the differences between managerial and financial accounting with much attention being given to the former.
The main difference between managerial and financial accounting
Financial accounting as a tool is used to access the fiscal health of a business mostly for the benefit of external stakeholders. Therefore, the audience of financial accounting includes stockholders, the board of directors, investors, and other institutions. All activities that pertain to financial accounting are time-related. For instance, financial accounts often reflect the performance of an organization over a certain period.
Financial accounting is regulated by various existing principles such as the General Accepted Accounting Principles (GAAP). Therefore, “financial accounting reports must be filed at least annually and they have to be made public in the case of publicly traded companies” (Etramway, 2007). Managerial accounting is a tool that managers utilize in their decision-making duties. Managerial accounting is part of an organization’s daily activities and it is not based on past data but prevailing and future conditions. The most distinctive feature of managerial accounting is the fact that it is short-term. Therefore, “managers often have to make operational decisions in a short period in a fluctuating environment, management accounting relies heavily on forecasting of markets and trends” (White et al., 2011).
The main difference between managerial and financial accounting is that the former is for internal purposes, while the latter is for external uses. Both accounting disciplines are important to business progress because financial accounting is vital to investors while managerial accounting aids in progressive decision-making. Financial accounting is more rigid than managerial because it is subject to GAAP.
On the other hand, managerial accounting is a relaxed affair that mostly involves ‘guesses or estimates’ (Etramway, 2007). In managerial accounting, accuracy is often not an issue as long as a manager can be able to make informed decisions.
In today’s business environment, the managerial accounting profession has risen in prominence. In just a few decades, managerial accounting has moved from being theoretical to a practical application. For instance, a 2011 survey on accounting trends revealed that “managerial accounting skills are going to be in high demand in future as a result of major shifts in the global economy” (White et al., 2011). The advent of the information age in the 21st century has meant that managerial accounting is a major determinant of an organization’s success. Therefore, it is now important for professionals to be able to account for information management.
Managerial accounting has changed a lot over time beginning from the era of the Industrial Revolution (Martin, n.d.). During this time, operations moved from the home to the office and the management of multiple processes gave birth to managerial accounting. The Industrial Revolution also made it necessary for businesses to seek scientific management movement. Later on, managerial accounting was affected by several factors including the convergence of modern transport, the need for environmental conservation, globalization, mass food industry, civil movements, and the advent of the digital age. Today, managerial accounting grows in tandem with a business’ level of information requirements.
The CMA designation is one of the most important qualifications in the field of management accounting. Overall, there are approximately twenty thousand CMAs in the world. CMA designation is offered through the Institute of Management Accountants (IMA), a global organization that certifies qualifications. CMA is offered after a candidate satisfies several requirements including having a bachelor’s degree and passing two exams.
Ethics is a major component in CMA designation and individuals might lose their status for not upholding this practice. Essentially, “Obtaining a CMA demonstrates a commitment to the profession because of the time and financial costs required and also signals that a job applicant or employee has a certain level of experience in management accounting” (Martin, n.d.).
Etramway. (2007). Introduction to managerial accounting. Web.
Martin, J. R. (n.d.) Management accounting: concepts, techniques, and controversial issues. Web.
White, L., Clinton, B., Merwe, A., Cokins, G., Thomas, C., Templin, K., & Huntzinger, J. (2011). Why we need a conceptual framework for managerial costing. Strategic Finance, 93(4), 36-42.