This article provides a basic explanation of managerial accounting and the ways in which it differs from financial accounting.
Purpose
Managerial accounting is meant to provide managers with the data that they need to make decisions regarding an accounting problem. This information needs to be more specific than the company’s balance sheet or income statement, in order to develop an informed strategy. Information may include budget adjustments that account for rising costs, and projected profits based on future scenarios.
Time Period
Financial reports are produced quarterly or yearly, depending on the company. For managerial accounting, reports are created based on management’s needs. For example, if the owner of a company recently decided to create a budget for advertising, he/she might request a report detailing the sales and costs of each product to determine which are selling well and ought to be promoted in a marketing campaign.
Audience
For financial accounting, the reporting audience is external, whereas for managerial accounting the reporting audience is internal. Financial accountants compile reports for regulators, determining the company’s status in accordance with Financial Accounting Standards Board (FASB) standards. Also, the financial accounting contained within the company’s annual report describes the company’s financial health to shareholders and creditors. In the case of managerial accounting, the reporting audience is a company department or group in which the internal data and information is relevant.
Quality of Data
While financial accounting reports tend to be objective and verifiable, management reports are subjective and based on relevance to internal departments or groups. Management reports are more concerned with relevance than precision. For example, a mortgage brokerage firm that is putting together an analysis based on land prices for a future shopping center is not going to be concerned about exact prices. Having numbers in the millions (as opposed to the thousands) may be all that is necessary to make a proper decision.
As a small business owner, you may be faced with a variety of problems that require an in-depth understanding of organizational budgeting and planning, or pricing products and services. Business management accounting will provide you with the knowledge necessary to make the best decisions for your company.
