Which of the following statements is a difference between financial accounting and managerial accounting?

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Most business owners don’t notice the difference between financial accounting and managerial accounting. Financial accounting involves aggregating accounting information into business financial statements. On the other hand, managerial accounting involves all internal processes that you use to account for business transactions. This article will focus on the differences between the financial accounting and managerial accounting in the following areas.

Aggregation

The financial accounting is used to report the state of the entire business performance. It focuses on the general profits/losses, the financial position (Also see Non-profit Accounting – Statement of Financial Position) of a business at a given time, and more. Managerial accounting usually offers more detailed reports regarding profits by product, customer, demographic region, and more.

Valuation

Normally, financial accounting addresses effective valuation of liabilities and assets. Therefore, it is involved with revaluations, impairments (Also see Impairment versus Depreciation of Fixed Assets), and more. On the other hand, managerial accounting isn’t involved with the valuation of the assets and liabilities. Instead, it aims at revealing the productivity of each asset and determining why a particular liability is necessary.

Systems

Financial accounting is concerned with the outcome of the system that your business has for generating profits. This implies that financial accounting doesn’t use the system. Instead, it uses the outcomes. For example, a financial accountant isn’t interested in the payment methods that your clients use. Instead, the accountant (Also see 5 Ways a competent Accountant will save your Business Money) is interested in the value of goods sold or purchased.

Conversely, managerial accounting is concerned with the location of bottleneck operations and different ways of improving profits by solving any bottleneck issue that may occur.

Timing

Financial accounting requires you to prepare the financial statements at the end of each accounting period. You can determine the accounting period depending on your business complexity, requirements by the FRS, and more. Note that managerial accounting might require you to issue the reports frequently because the information contained in those reports useful to the managers and it would be better if they see it right away.

Standards

Financial reporting must comply with all financial reporting standards. Note that this applies to all businesses and accounting firms in Singapore. Note that managerial accounting usually creates information and reports for internal consumption and therefore, it may not require you to create the reports according to FRS.

Both financial accounting and managerial accounting are equally important when it comes to business operations. This requires you as the business owner to either be an accounting expert or outsource the accounting tasks to accounting professionals.

Most accounting tasks can be divided into financial accounting and managerial accounting. It is useful to describe the differences between these two aspects of accounting, since each one describes a distinctly different career path. In general, financial accounting refers to the aggregation of accounting information into financial statements, while managerial accounting refers to the internal processes used to account for business transactions. There are a number of differences between financial and managerial accounting, which are noted below.

Aggregation

Financial accounting reports on the results of an entire business. Managerial accounting almost always reports at a more detailed level, such as profits by product, product line, customer, and geographic region. Financial accounting reports are more likely to be distributed to outsiders, while the results of managerial accounting are more likely to only be used by insiders.

Efficiency

Financial accounting reports on the profitability (and therefore the efficiency) of a business, whereas managerial accounting reports on specifically what is causing problems and how to fix them. Managerial accounting reports are more likely to be of use in improving operations, while financial accounting reports are used by outsiders to decide whether to invest in or lend to a business.

Proven Information

Financial accounting requires that records be kept with considerable precision, which is needed to prove that the financial statements are correct. Outside auditors rely on this information when auditing a firm’s financial statements. Conversely, managerial accounting frequently deals with estimates, rather than proven and verifiable facts.

Reporting Focus

Financial accounting is oriented toward the creation of financial statements, which are distributed both within and outside of a company. Managerial accounting is more concerned with operational reports, which are only distributed within a company.

Standards

Financial accounting must comply with various accounting standards, whereas managerial accounting does not have to comply with any standards when information is compiled for internal consumption.

Systems

Financial accounting pays no attention to the overall system that a company has for generating a profit, only its outcome. Conversely, managerial accounting is interested in the location of bottleneck operations, and the various ways to enhance profits by resolving bottleneck issues.

Time Period

Financial accounting is concerned with the financial results that a business has already achieved, so it has a historical orientation. Managerial accounting may address budgets and forecasts, and so can have a future orientation.

Timing

Financial accounting requires that financial statements be issued following the end of an accounting period. Managerial accounting may issue reports much more frequently, since the information it provides is of most relevance if managers can see it right away.

Valuation

Financial accounting addresses the proper valuation of assets and liabilities, and so is involved with impairments, revaluations, and so forth. Managerial accounting is not concerned with the value of these items, only their productivity.

Certifications

There is also a difference in the accounting certifications typically found in each of these areas. People with the Certified Public Accountant designation have been trained in financial accounting, while those with the Certified Management Accountant designation have been trained in managerial accounting.

Pay Levels

Pay levels tend to be higher in the area of financial accounting and somewhat lower for managerial accounting, perhaps because there is a perception that more training is required to be fully conversant in financial accounting.

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