In this video you'll discover the similarities between managerial

accounting and financial accounting. Then I'll give you five major differences

that separate these two practices.

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Hey viewers, I'm James and welcome to Accounting Stuff, the channel that

teaches you everything you need to know about accounting and bookkeeping.

Since I started this channel a few months ago the focus here has

really been on Accounting Basics. I've put together a playlist covering

accounting for beginners style topics. We've done the accounting equation,

assets liabilities and equity, debits and credits and then we've

talked about how these areas can be linked together to form financial

reports like the income statement, the balance sheet and the

cash flow statement. All of these topics have one thing in

common. They fit under the umbrella of

‘financial accounting’. But Accounting is much much bigger

than just financial accounting. You can think of it as a tree

with many branches and one of these branches is ‘managerial accounting’.

Until now, I haven't really touched on this topic.

But I've received a bunch of requests for it from you guys down in the

comments so thanks for these I value your feedback and it's always helpful

for me to see what content you'd like to see featured on this channel.

Personally I find managerial accounting fascinating for many reasons

that you'll soon discover. So I'm going to create a new

playlist dedicated to this topic. That I'm going to keep adding to overtime so

subscribe and hit the bell to be notified when those videos come out.

We've got plenty to cover. But anyway in this video it seems

logical to start off with a question of what managerial accounting actually is?

And how is it different from financial accounting? Like I said at the start you're going

to find out the similarities and differences between these two branches of accounting.

And don't forget to watch this through until the end because I'll be sharing my

thoughts on which is better. Let's do this.

Definitions

I want to kick things off with a couple of definitions.

Financial accounting is the process of recording, summarising and analysing

an entity's financial transactions and reporting them in financial statements

to its existing and potential investors, lenders and creditors.

On the other hand, managerial or management accounting is

the process of identifying, measuring, interpreting and communicating

information to management to assist them in planning, decision-making

and risk management. Hmm…

If that doesn't make a whole lot of sense to you then honestly I don't blame you.

Trying to summarise two broad practices into just a couple of

sentences is a difficult task. I think it's easier to build a picture of these

two branches of accounting by looking at

their similarities and their differences. So how are they similar?

Well like I just mentioned they're both branches of accounting.

Accounting which has been referred to as ‘the language of business’ is a

huge field of study that can be divided up into several different practices.

Things like financial accounting, managerial accounting,

tax accounting, audit,

bookkeeping and forensic accounting

are all different branches of the same tree. And financial and management accounting

are just two of those branches. They also both involve collecting

financial information and presenting it to their target audience in the form of

financial reports. But who is the target audience?

And what financial reports? We'll get into that now as we talk about

the five differences between financial and managerial accounting.

Difference number one. Who is the target audience?

Target Audience

In financial accounting the target audience is external,

and in managerial accounting its internal. Let me explain how that works.

Both the Financial Accounting Standards Board, and the International Accounting Standards

Board who respectively come up with

US GAAP and IFRS, state that the primary users of

financial statements are an entity's existing and potential investors,

lenders and creditors. That's because the main

objective of financial accounting is to report on a business's financial health

to these external parties. That's not say that other groups of

people like Management, Regulators and the Public

won't find financial statements useful. But keep it in mind that existing and

potential investors, lenders and creditors are the main reason why

financial statements exist. To protect these external parties

that are funding or potentially going to fund the business.

In contrast to this, in managerial accounting the target

audience is all internal. The main objective here is to

create internal reports to help the managers within the business

plan for the future, make informed business decisions and manage risks

which in turn will impact on performance and profitability.

Okay so now for difference number two. Outlook.

Outlook

When it comes down to it, Financial Accounting involves reporting

on past transactions and events whereas managerial accounting is

more focused on the future. Financial accountants put

together reports like the income statement and the balance sheet to

summarise transactions that happened over a period of time, or the closing

balances of assets, liabilities and equity at a single point in time, in the past.

This period of time, or point in time that we're talking about

is always in the past. And its historical information

that financial accountants rely on to build these financial statements.

On the contrary, management accountants make

reports to help management make decisions that impact the future.

Like budgets or forecasts which determine how a business chooses

to allocate its resources. Next up I'd like to talk about scope,

Scope

because this is completely different for both of these accounting branches.

In financial accounting the scope is broad.

Financial statements consolidate the results of all of the different

departments and business units so that external parties can get an

understanding of the big picture of the whole business.

Meanwhile in management accounting, the scope is much more narrow.

Management accountants like to slice a company up into different segments

divisions and cost centres to provide the managers of all of these different

areas with detailed reports to help them specifically.

These reports might not be limited to financial information either.

They might contain non-financial information like detailed commentaries

or explanations to help support the data by telling the story.

And that leads me nicely into difference number four.

Priority

Priority. In financial accounting the focus

is always on being objective and precise. Financial statements are meant

to reflect a true and fair view of the business's state of affairs at the end

of an accounting period. No guesstimates allowed here.

Go to managerial accounting the priority is on being relevant and timely.

What use is a super accurate report if it comes to a manager too late and

isn't relevant anymore? For this reason, management accountants

are given more leeway to use estimates and shortcuts if it means that they can

deliver their analysis on time. Estimates and shortcuts...

sounds a bit dodgy hey? Don’t management accountants

Regulation

have some rules to follow? Not really, because their reports and

analysis are confidential and for internal use only.

Management accounting is less regulated than financial accounting.

There's no framework to follow. So their reports can take on

whatever format they like. However financial accounting

is heavily regulated. Remember when I talked about

GAAP and IFRS earlier on? Well these are the principles

and standards that financial accountants have to adhere to.

GAAP and IFRS lay out a strict roadmap that show us how we should record

transactions and present that information in financial statements like

the income statement, the balance sheet and statement of cash flows.

And that's no wonder really, since the users of these statements

are external, they need to be protected from fraud and misinformation.

And on top of that, financial statements sometimes need to be audited.

Audit it's a completely different branch of accounting where business hires an

independent, external group of accountants, whose job it is to review

and check over financial statements before they can be approved and sent out

to the external lenders and investors. Now at the start of this video I

promised you 5 differences. But as a little bonus to you I've got one more.

Are they necessary

Difference number six. Are they even necessary?

Management and financial accountants… Who needs them?

This one's nice and simple. Financial statements and therefore

financial accountants become essential once a business grows above a

certain threshold that’s unique to your country.

Whilst management accountants are technically not required.

You can think of them, more as a luxury. That companies don't necessarily need,

although they can be extremely valuable when it comes to making decisions about

strategy and the future. So which is better?

Conclusion

That is a very hard question and probably a silly one for me to have even

brought up in the first place. But I'll have a crack at it…

I think it really comes down to who you are. As an external investor, you'd

obviously value financial accounting more because the internal

reports created by management accountants are confidential, so you’d

never see them. That being said,

you would hope that the business is making use of managerial accounting

to plan for the future, make informed decisions

and reduce risks where possible. For most, financial accounting

is an absolute necessity, however managerial accounting can be

extremely valuable when it comes to impacting future performance and

profitability. Thanks for watching!

If you found this video useful give it a like,

share it, comment

and subscribe for more managerial accounting tutorials.

As always, if you've got any questions let me know down below in the comments.

Or message me directly on instagram @accountingstuff.

Til next time!

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