Accounting is the process of record keeping for all financial transactions conducted by a business or organization. The kind of accounting a company employs in its financial reporting depends on the kind of company it is as well as its financial needs.
For the purpose of this article, we will look at how managerial accounting differs from financial accounting and some of the common principles in this branch of accounting.
The common concepts and techniques of managerial accounting are all the concepts and techniques that surround planning and budgeting, short- and long-term project decision making and operational measurement of performance.
Before we take a look at some of the concepts of managerial accounting, it's important to understand how this branch of accounting is defined.
Definition of Managerial Accounting
Managerial accounting is the process of identifying, analyzing, recording and presenting financial information so internal management can use it for the planning, decision making and control of a company.
Unlike financial accounting, there is no prescribed set of principles or standards that companies must follow when doing their managerial accounting. Accountants in these cases may use different procedures in their managerial accounting because of the variety of rules that apply to different businesses and their operations. Therefore, it is not a one-size-fits-all approach. So a small mom-and-pop chip stand may have different accounting procedures than a used car lot.
How Does it Differ From Financial Accounting?
Managerial accounting is in stark contrast to financial accounting, which is the process of preparing and presenting quarterly or yearly financial information for external use, such as a company's audited financial statements for the public.
Public companies in the United States must abide by generally accepted accounting principles (GAAP) when they do their financial accounting. These are accounting principles, standards and procedures companies must follow with each and every financial statement they produce. International companies also have a set of standards they follow based on the region in which they are based.
Data compiled via financial accounting often end up on a company's balance sheet, income statement and cash flow statement. These statements all record the company's performance over a certain period of time.
While financial accounting is used for reporting to the external investors, shareholders, and stakeholders, managerial accounting is information provided to the company's internal managers and the business's owners so they can plan and control the business's activities.
Planning and Budgeting
In managerial accounting, weekly and monthly budgets are used to determine what to sell, how much of it to sell and what price should be charged in order to cover all costs laid out in the budget and make a margin.
One example of this is the capital budget. The capital budget is how a company evaluates expenses and/or investments that may take place in the future. These may include acquisitions, new equipment or facilities, or investing in a long-term project.
Project Decision Making
The second concept in managerial accounting is projected decision making. Managers use managerial accounting reports such as relevant costing to weigh the costs and benefits of undertaking a particular project. This can help improve longer-term decision making for many companies — especially small businesses. Small businesses generally have to make decisions every day.
Performance measurement is used to compare the actual results of operations with what was budgeted in the planning and budgeting phase.
Standard costing is a good example of this technique. These costs are typically related to manufacturing companies — the expenses related to direct material, labor and overhead.
The Bottom Line
Managerial accounting is a branch of accounting used to identify, analyze and record financial data so internal management can make sound financial decisions. Unlike financial accounting, which uses a standard set of principles, there is no generally accepted method of conducting this branch of accounting.