Accounting is the process of record keeping for all financial transactions conducted by a business or organization. Managerial accounting uses the accounts for budgeting and planning purposes and to measure the company's performance. The type of accounting that a company practices depends on the type of industry and the firm's financial needs.
Managerial Accounting Defined
Managerial accounting is the process of identifying, analyzing, recording, and presenting financial information so that internal management can make informed business decisions concerning the future. The accounts show a detailed picture of how a company is spending its resources, the state of cash flow, and the level of debt and assets. Company management parses that data and uses the information for business strategy.
Unlike financial accounting, there is no prescribed set of principles or standards that companies must follow in their managerial accounting. Accountants use different procedures in their managerial accounting because of the variety of rules that apply to different businesses and their operations. There is no one-size-fits-all approach. A small, individually-owned private company may have different accounting procedures than Walmart, for example, because Walmart must provide financial information to shareholders while the sole proprietor may only need to satisfy the bank that cash flow is sufficient to pay any loan.
Managerial vs. Financial Accounting
Managerial accounting differs from 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). These are accounting principles, standards, and procedures companies must follow for the financial statements they produce. International companies also have a set of standards they follow based on their geographic location.
Financial accounting data are is entered into a company's balance sheet, income statement, and cash flow statement. These statements record the company's performance over a certain period.
While financial accounting creates reports for external investors, shareholders, and stakeholders, managerial accounting provides information to the company's internal managers and the business's owners so they can plan and control the business's activities.
Planning and Budgeting
For managerial accounting, weekly and monthly budgets are used to determine what products to sell, how much of a product to sell, and the price that will provide a sufficient margin to cover costs.
Managerial accounting often includes the creation of a capital budget, which outlines the expenses and 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 job costing, to weigh the costs and benefits of undertaking a particular project. These reports are vital to longer-term decision making for many companies, particularly small businesses that may face business decisions daily.
Performance measurement is used to compare the actual results of operations with projections made in the planning and budgeting phase. Measuring performance is crucial for benchmarking whereby a company can compare its performance with competitors.
Standard costing is a good example of this technique. Manufacturing firms use this type of costing because expenses are composed of direct materials, labor, and overheads.
The Bottom Line
Accurate and relevant accounts are crucial to management accounting and wise decision making by company leaders. If the accounts are inadequate, management will find it difficult to make appropriate choices when it comes to the company's business strategy and its future.
Using managerial accounting methods, decision-makers can use the accounting data to make assumptions on the state of operations. For example, whether selling a certain product is profitable or whether another more profitable product should be sold in its place.
The way that management interprets the data and makes decisions based on that data will vary depending on the business type and the industry.