In business, financial accounting refers to the act of recording a company's financial transactions, which are typically examined by investment banking analysts and shareholders of public corporations. A separate practice known as managerial accounting refers to the discipline of record-keeping with an eye towards budgeting and performance measurement, typically conducted by small business owners.

Key Takeaways

  • Financial accounting and managerial accounting describe two distinct record-keeping disciplines.
  • Financial accounting mainly refers to the statements corporations present to investors and prospective shareholders.
  • Managerial accounting describes the process of analyzing financial information tracked by small business owners.
  • All corporations in the United States must adhere to the generally accepted accounting principles (GAAP), which are standardized accounting formats.
  • Performance reporting, a subsection of managerial accounting, lets sole-proprietors compare actual profits with projections.

Managerial Accounting Defined

Managerial accounting is the process of identifying and analyzing financial information so that management personnel can make better-informed business decisions. Although the specific underlying details of managerial accounts may vary from one business to the next, they often itemize a company's spending practices, cash flow streams, debts, and assets. This type of information helps sole proprietors make more measured decisions. It also aids small banks in evaluating whether or not a company is worthy of a small business loan.

Financial Accounting Defined

Financial accounting is the process of preparing and presenting quarterly or annual financial information for external use. Financial accounting reports may entail audited financial statements that help investors decide whether or not to buy or sell a given company's stock.

All public companies domiciled in the United States must abide by generally accepted accounting principles (GAAP), which are a set of accounting formats that help investors compare and contrast the metrics of different organizations. According to GAAP, a company must enter its financial accounting data in its balance sheets, income statements, and cash flow statements. International companies must likewise adhere to sets of accounting standards specific to their respective geographic regions.

Planning and Budgeting

For managerial accounting, weekly and monthly budgets govern the types of products sold, product inventory levels, and the price points needed to ensure that businesses maintain sufficient margins to cover costs and remain solvent. Furthermore, capital budgets outline potential future expenses, such as acquisitions, new equipment purchases, facility upgrades, and long-term project investments.

Performance Measurement

Businesses rely on performance measurement metrics to compare their actual results with projections they made during their planning and budgeting phases. Not only does performance measurement help a company course-correct flawed or unprofitable operations, but this crucial benchmark is instrumental in letting a company compare its performance with that of its direct market competitors.

The Bottom Line

Accurate and relevant accounts are crucial to management accounting and shrewd decision making by company leaders. If the accounting statements are inadequate, inaccurate, or incomplete, management may struggle to make appropriate choices when mapping out a company's long-term strategy.

Managerial accountants are not legally obligated to follow GAAP because the documents they produce are not subject to scrutiny by investment banks.