Financial vs Managerial Accounting

The main difference between financial and managerial accounting lies in their purpose, user groups, and time horizons. Financial accounting is primarily for external users such as investors, creditors, and government agencies, focusing on past transactions, while managerial accounting caters to internal users like executives and managers, providing insights into the future through projections. Managerial accounting also provides more detailed information about specific products, departments, or regions, allowing for comparison and variance analysis. Additionally, financial accounting is based on objective, verifiable data, whereas managerial accounting may involve subjective information, but this can guide decision-making in certain situations.

The difference between financial and managerial accounting with regard to user groups and
time horizons is explained below.
Criteria 1 - User Groups:
Financial Accounting would be best described as external accounting since it caters
primarily to information needs of external users such as suppliers, government agencies,
investors, creditors, etc. and is bound by the applicable financial reporting framework such as
IFRS or country-specific GAAP. In contrast, Managerial Accounting can be described as
internal accounting which caters to the information needs of internal users such as
executives, managers, and workers besides providing a lot of flexibility in gathering both
financial and non-financial information and presenting the same in a way customized to the
needs of the user of such information. Thus, while a lender or a government agency may not
be interested in knowing the value of intellectual capital of the firm, the managers of the firm
may find this to be an interesting metric and may wish to attach a number value to the
intellectual capital of the firm. [1] This is where the managers of the firm turn to information
and techniques provided by managerial accounting.
Criteria 2 - Time Horizons:
Financial Accounting is always based on transactions or events that have already occurred.
Thus, in terms of time horizon, financial accounting is solely concerned with the past.
Besides, financial accounting fails to provide insights for the longer term. However,
Managerial Accounting is very flexible with the time horizon since it uses information from
transactions that occurred in the past and also provides projections that look into the future.
The projections could be for both short-term as well as for long-term, and this is particularly
useful for small and medium sized business trying to better their operations through use of
accounting and financial data for short-term and long-term planning. [2]
References:
1. Tayles, M., Bramley, A., Adshead, N., & Farr, J. (2002). Dealing with the
management of intellectual capital. Accounting, Auditing & Accountability
Journal, 15(2), 251-267. doi:10.1108/09513570210425574
2. López, O. L., & Hiebl, M. R. (2015). Management Accounting in Small and Medium-
Sized Enterprises: Current Knowledge and Avenues for Further Research. Journal of
Management Accounting Research, 27(1), 81-119. doi:10.2308/jmar-50915
The chief accountant must have a clear understanding of both financial and managerial
accounting since both serve certain different purposes.
 Financial accounting saves managers time as it only offers a bird’s eye view of the
financial performance of the organization. However, management accounting, given
its inter-linkages with economics, operations, engineering and other functions, gives
information which is more detailed with regard to specific products, departments,
regions, entities, and even employees. This facilitates comparison between products,
departments, regions, entities, etc. and helps with analysis of variances that show up
when managers take time to conduct detailed analysis.

 Financial accounting allows recording as well as reporting of measurable events and
transactions that have already occurred, and thereby acts as the language by which the
business communicates its broad operational and financial performance to its ultimate
owners. Management accounting relies on both historical information and information
that relates to the future. For instance, management accounting information is widely
used in the preparation of budgets that are focused on the future. This is how
management accounting helps those with decision making authority to get a clearer
picture of not just what happened but what can be expected to happen, and thus
influences their behaviour towards decisions that are optimal for business. [1]
 Financial accounting information mostly tends to be both objective and verifiable
since every single transaction or event is recorded based on some documentary
evidence. In a few instances, however there is a susceptibility of financial accounting
information to be manipulated for window dressing the financial results and make a
company CEO’s performance look good. [2] When compared with financial
accounting, management accounting information could be subjective in nature.
However, having subjective information at hand can often guide decision-making in
situations where the available objective information fails to reveal certain important
aspects essential to decision-making.
References:
1. Nwonyuku, K. N. (2015). Behavioral Implications of Management Accounting
Practices: A Contemporary Issue in Management Accounting. SSRN Electronic
Journal. doi:10.2139/ssrn.2656521
2. Olsen, K., Dworkis, K. and Young, S. (2014). CEO Narcissism and Accounting: A
Picture of Profits. Journal of Management Accounting Research, 26(2), pp.243-267.