Introduction
Accountancy is predominantly divided into two branches covering Financial Accounting and Managerial Accounting. From Budget forecasting to its actual footprints on an organisation’s financial statements, an accountant’s role is spread on a wide spectrum of performance analytics.
The parameters of accounting extend beyond the use of financial data as non financial factors are crucially to be considered. But how well are we able to differentiate the roles underlining different types of accounting? Let us develop a better understanding through the following comprehensive study on the same.
What is Financial Accounting?
Financial accounting is the division of accountancy which deals with recording, summarising, analysing and reporting of daily financial transactions that fall within the ambit of a business. Thereby, periodic financial statements are prepared for depicting the financial position of an entity.
What is Managerial Accounting?
The branch of Managerial accounting helps an organisation to function within the framework of a well-planned roadmap and develop efficiency. This involves setting future targets, tracking current performance, analysing past performance and thereby forecasting future trends.
The importance of Financial Accounting and Managerial Accounting
Financial Accounting:
- Keeping track of financial transactions: To draw meaningful conclusions from daily transactions of an organisation, financial accounting frames out a language for tracking the information by documenting and recording it.
This primary function is done through double-entry bookkeeping and by following the basic principles of accounting – The Revenue principle, Expense recognition principle, Objectivity principle, Matching Principle and Cost principle.
- Comparison and analysis: For growth sustainability every entity needs tools and techniques to be able to compare its past and present performance as well as for studying industry comparables.
The financial ratios are Liquidity ratios, Profitability ratios, Leverage ratios, Turnover ratios and Market value ratios. Thereby aiding in examining and researching competition along with investment opportunities.
- Communication with stakeholders: Financial accounting functions as a window to an organisation’s financial health and performance. Keeping in mind the needs of an inclusive list of stakeholders covering shareholders, banks, government and creditors, the financial information is broken down into different parts namely the Income statement, The Balance Sheet, Cash Flow Statement and Statement of Retained Earnings.
Managerial Accounting:
- Ladder to achieve operational goals: The essence of Managerial accounting lies in striving for an efficient operational flow of an organisation by systematic planning, organizing, directing, and controlling the management.
The forecasting and planning derived from past data helps an entity to take timely corrective actions. The process includes tracking present performance, variance analysis and allows the organisation to have clarity regarding outsourcing decisions and retaining in house operations.
- Data and trend analysis: Managerial accounting provides different frameworks to accommodate various types of data thereby helping to conclude analysis. The pool of data might seem overwhelming due to inclusion of qualitative and quantitative factors; this confusion is tackled by implementing systematic techniques. The trends are usually analysed over different dimensions such as period of time, supplier-wise and geographically.
Techniques in managerial accounting include Marginal analysis, Constraint analysis, Capital budgeting, Inventory valuation, standard costing and product costing. Historical data is studied along with future targets while these methodologies help the management to investigate and correct its degree of alignment towards operational performance goals.
- Inducing Innovation: The key factor that evolves within the process of Managerial accounting is innovation. As the targeted stakeholders of managerial accounting are the internal stakeholders of the organisation, the process of management accounting ensures the flow of new ideas into its planning and implementation process.
Key Differences
Points of difference |
Financial Accounting | Managerial Accounting |
| Objectives | To facilitate periodical reports and evaluate the financial position of the entity. | To assist internal management in efficient decision making and improvement of operational activities. |
| Time period | One has to follow fixed periods for the preparation of financial statements. | One can consider ad-hoc basis for preparation. |
| Stakeholders | External and internal stakeholders. | Useful for internal users. |
| Framework | As specified by the respective authority or an institution to maintain uniformity. | There is no specified format to follow. |
| Rules and compliance | Applicable rules and principles of GAAP, IFRS, IND AS. | No prescribed rules and principles. |
| Audit and publishing | Required to be published and audited by statutory auditors. | For internal use only. |
Conclusion
Financial accounting and Managerial Accounting build up an integral part of an organisation’s growth and performance. The primary roles of both accounting types are crucial for a business and thus, it is vital that an organisation has a healthy implementation of both types of accounting in place.
Written by- Priyanka Rampal
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