Managerial Accounting Vs. Financial Accounting

Both financial accounting and managerial accounting will reflect identical financial transactions within the organization and make use of the same accounting basis or method, however each has a different and specific focus (Horgren, Harrison, and Bamber, 2005).

The financial accounting cycle and related reports generally serve to communicate specific economic data to individuals or concerns with an external relation to the direct business operations (Atkinson, Kaplan, & Young, 2005). Managerial accounting focuses on providing managers, or those within the organization, with financial information necessary for responsible decision making relative to maximizing on profitability, efficiency and value through specific process, product, and operational data (Garrison, Noreen, and Brewer, 2008). Aside from the intended audience, financial and managerial accounting also differ in terms of purpose, time horizon and reporting frequency, the types of reports generated, level of aggregation, regulation, informational characteristics, and the consequent organizational behavioral implications (Horngren, et al., Edmonds, Edmonds, Tsay & Olds, 2006).

Financial accounting utilizes historic economic performance data to communicate how well the organization as a whole has performed, and can also provide external users with specific performance information relevant to making investment and lending decisions through ratio analysis or trend analysis. Using the financial accounting reports, the income statement, the balance sheet, and statement of cash flows, bankers and other potential investors or lenders can interpret necessary performance data with the application of profitability ratios, liquidity ratios, debt ratios, market value ratios, and asset activity ratios to provide an accurate insight into the organization's financial standing and capabilities (Atkinson, et al., Gallagher & Andrew, 2003).

In contrast, managerial accounting data serves to provide internal organizational members with the information necessary to continually improve upon the many operations and processes through well-informed decision making using product and process specific financial data. Although historic data is used to assist in the decision making process and for understanding progress, managerial accounting has a current or future focus as the information accumulated and collected is typically applied to make decisions affecting current operations and for future planning, budget creation and control (Atkinson, et al.). Consistent influx of production cost data assists in developing and changing product lines as new technologies become available and the impact of continual external market influences are realized in operational and production costs. Specific product and process costs will further provide a basis upon which pricing decisions are made.

Examples of different types of managerial accounting reports one might encounter within the organization are divisional and main budgets for the upcoming operational period, reports of organizational progress as it relates to the budget, historic and/or prospective specific product and process cost data and analysis, and reports that contain non-financial data communicating effectiveness and efficiency in other areas such as customer satisfaction or timeliness of production and/or product turnaround. Unlike financial reporting in which only financial data is used and communicated to the user, managerial accounting will make use of not only quantitative data, but qualitative data as well. The importance of having and sharing this information is evident when considering the many factors essential to maintaining maximum efficacy in operations. It would prove fruitless to have achieved maximum efficiency in production, if we have failed in delivering quality, on-time service.

The frequency of data reporting is another discrepancy between managerial and financial accounting practices. The reporting periods of financial accounting are constant, such as on a quarterly and annual basis. Managerial accounting reports are generated as needed for appropriate control and planning, and will cover any time span deemed relevant by those using and applying this data in creation of continually improving operations and strategy. For instance, as the organization strives to improve production times on specific products, a weekly report comparing progress to past production times and/or probable or likely changes in future performance might be created. Likewise, in an attempt to employ a zero-defect policy, a daily report of progress relative to changes in defective units might be created to assist management in pinpointing problem areas or processes that they might be readily addressed. Financial accounting focuses on objectivity, reliability, and consistency of historical economic and transaction data whereas the process of managerial accounting will have a greater focus on relevancy and timeliness as it relates to the different processes and management decisions using sometimes estimated or non-verifiable data that will directly address the issues at hand (Edmonds, et al., Garrison, et al.).

The many reports used and created in managerial accounting will cover many different departments within the organization, many different processes, and numerous products or services offered by the firm, making managerial accounting highly aggregate as compared to financial accounting. Accumulating and reporting operational data on an organization-wide scale does not serve management to make more specific and intelligent decisions. Unprofitable processes or products would go unnoticed and continue to drain resources that could be invested in further growth. Specific market and customer data would not available to assist in more effective marketing strategies, maximizing on the potential value and future stability of our organization (Garrison, et al.).

Unlike mandatory financial reporting, which must be created to comply with GAAP and regulated by the SEC to protect all interests in organizational activities, management accountant is not mandatory and is regulated only by ethics and the value-added principle. Rules relative to managerial reporting are set by the mangers within the organization as to the included content and usable format of the content. Prospective benefits of employment of managerial accounting practices and the results of the operational decisions resulting from the use of this accounting data should outweigh the costs associated with the process of management accounting and inherently serve to increase the value of the organization through controlling or mitigating risk and improving overall efficacy (Edmonds, et al., Garrison, et al.).

Both the financial and managerial accounting processes have inherent behavioral considerations within the organization. Regulations associated with financial accounting will produce concern and focus on accuracy and adequacy of disclosure. Behavioral considerations associated with managerial accounting are more primary to operations as the results of this process will directly impact employee behavior and activity. While management attempts to introduce, redesign, and enhance performance, behavioral changes and expectations will also be changed. Realizing the impact of change on organizational operations, managers and management accountants must take these changes and their anticipated impact into consideration during the planning and decision making processes. This leads to further analysis associated with behavioral and organization reactions (Atkinson, et al., George, Jones, 2005).

The differences between these two fields of accounting are many, but it is easy to see how each is crucial to the continuing success of any organization. Through planning, controlling, and improving the efficacy of the many operational processes through managerial accounting, we can further secure continual growth, investment opportunity, stability and value that will result and be reflected in the company's financial reporting.

Sources Cited:

Atkinson, A.A., Kaplan, R.S., and Young. S.M. (2005). Management accounting, custom ed.
Pearson Custom Publishing, Pearson Prentice Hall. Upper Saddle River, NJ.

Edmonds, T.P., Edmonds, C.D., Tsay, B.Y., and Olds, P.R. (2006). Fundamental managerial
accounting concepts, 3e. McGraw-Hill Irwin. Boston, MA.

Gallagher, T.J. and Andrew, J.D., Jr. (2003). Financial management: principles and practice, 3e.
Pearson Prentice Hall. Upper Saddle River, NJ.

Garrison, R.H., Noreen, E.W., and Brewer, P.C. (2008). Managerial accounting, 12e., McGraw-
Hill Irwin, Boston, MA.

George, J.M. and Jones, G.R. (2005). Understanding and managing organizational behavior.
Pearson Custom Publishing. Pearson Prentice Hall. Upper Saddle River, NJ.

Horngren, C.T., Harrison, W.T., and Bamber, L.S. (2005). Accounting, 6e., Pearson Prentice
Hall. Upper Saddle River, NJ.