It’s important that, whether you’re a business owner or a budding accountant, that you understand the differences between management accounting and financial accounting. It’s a common misconception that all accounting is the same, but it’s actually a highly-complex industry that relies on knowledgeable, highly-experienced professionals, such as the ones we have here at RLTP Accountants. So what is management accounting and what’s financial accounting? We’re on hand to help you understand further.
What is management accounting?
Management accounting is commonly referred to as managerial accounting and this is because management accounting is most often used by business directors and managers in order to make educated, informed decisions about the day-to-day operations within their company. A key thing to consider here is that management accounting is not based on current and future trends as opposed to the business’ past performances.
Management accounting can be used for determining how much you should charge for a new service or product. It will involve the analysis of how much revenue the new line is likely to make.
This information can then be used to either lower or heighten the price of a new service or product or it could even result in the scrapping of the plans altogether if it doesn’t look like a worthwhile venture. Business owners often need to make vital operational decisions and managerial accounting will help them to do this in a short amount of time.
What is financial accounting?
Financial accounting is used to detail the financial state of a business to outside stakeholders. It allows the following people to access information about how well the company has performed, financially, over a specific time period:
- The board of directors
- Financial institutions
- Potential investors
More often than not, these financial accounting reports are published and filed on a yearly basis. It’s important to note, however, that if one of those businesses is a publicly-traded company on the stock market, then those financial reports will have to then become part of the public record.
What’s the difference between management accounting & financial accounting?
As you have probably already noticed, there is a major difference between managerial accounting and financial accounting, but the differences between the two run far deeper than you might have otherwise thought. Here’s how else management accounting and financial accounting differ:
Financial accounting essentially reports of the profitability of a company, which translates into how efficient they are at generating revenue and turning over profits. Management accounting, however, doesn’t report on past financial performances. As already discussed, it predicts future trends in order to iron out any problems before they occur. This way, they can be fixed or ideas can be abandoned to protect the financial status of the business.
Managerial accounting is used to improve operations throughout the company, whereas financial accounting is beneficial for outsiders who have either already invested in a business or who are looking to. Therefore, the efficiency side of things comes from financial accounting as opposed to management accounting. But it could be argued that managerial accounting will increase the efficiency and profitability of a company in the long run.
Financial accounting doesn’t delve into how a business is making their money. Instead, it reports on past financial performances. Managerial accounting looks at business operations in such a way that profits can be increased, allowing for positive financial reports. Financial accounting is only interested in how a company generates profit rather than how the company works, systematically. Management accounting is more concerned with looking at ways to eliminate bottleneck issues, if there are any.
Time periods at play
Financial accounting focuses attention on the historical orientation of a business. Financial reports are published annually, whereas managerial accounting can be implemented several times within the same time period. This is because management accounting looks at current and future trends, whereas financial accounting presents more of a historic record.
There’s a difference in accounting certifications when it comes to managerial and financial accounting. Accountants with the Certified Management Accountant accreditation will have been trained in management accounting, whereas those with the Certified Public Accountant accolade are trained in financial accounting.
RLTP Accountants have a dedicated team of highly-qualified specialists at the heart of everything we do. Whether you’re looking for payroll or bookkeeping services or need help with self assessments, company formation or budgeting and forecasting, we’ll always be on hand to guide and support you and your business with a wealth of accountancy services on offer. For more information, get in touch with one of our fully-trained, experienced accountants today – we’re always happy to hear from you.