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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