Accounting can be broken down into many different categories and areas. Managerial and financial accounting is only two parts of the cost accounting system. Within these two different aspects of accounting, there are many similarities and differences not only between these categories but also in their rules and regulations, management information and reporting requirements as well. The certifications of accountants are also differentiated in these two categories, CMA and CPA. No matter what category you place an accountant in; the job is crucial in the business world.
Managerial vs. Financial
Managerial accounting is part of a company’s management information system, which provides accounting and other quantitative data to managers at all levels inside the organization. The preparation of information is used for decision making, planning, directing and controlling a company’s operations. Financial accounting is the use of accounting information for reporting to parties outside the company. The preparation of information is used for published financial statements and other financial reports.
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The focus of managerial accounting is on the needs of managers within the company rather than the interested parties outside the company. Some of the users of financial accounting information are current and prospective stockholders, lenders and investment analysts. The main similarity between the both is that they both draw upon data from an organization’s basic accounting system, mainly the cost accounting system.
Rules and Regulations
Managerial accounting does not require regulations and is unregulated because it is intended only for management within the company. Financial accounting requires regulation and must conform to a widely accepted set of rules, standards and procedures known as the generally accepted accounting principles (GAAP). They are regulated by the Financial Accounting Standards Board (FASB) as well as the Securities and Exchange Commission (SEC). The rules of accountants also depend on their own professional standards as well as their professional ethical standards.
Management and Reporting
Both managerial and financial accountants have a responsibility to management incompetence, confidentiality, integrity and objectivity. Managerial accounting’s reports often focus on subunits within the organization, such as departments, divisions, geographical regions or product lines.
These reports are based on combined historical data, estimates and projections of future events and “may be very detailed” (2004). Financial accounting reports focus on the enterprise in its entirety. These reports are based almost exclusively on historical transaction data.
CMA and CPA
Managerial accounts can earn professional certification. A Certified Management Accountant (CMA) is an accountant who has earned a professional certification in managerial accounting. Financial accounts can also earn professional certification. A Certified Public Accountant (CPA) is an accountant who has earned a professional certification in financial accounting. Both certifications require qualifying education, experience in related fields as well as the passing of an exam.
Accounting in general is a very important job within a company and crucial in the business world. Managerial accounting and CMA’s, financial accounting and CPA’s are both different from the accounting world with some similarities as well. Within these similarities and differences, the use of these accountants satisfies both internal and external needs.
Example 2 – Financial vs. Managerial Accounting
Financial vs. Managerial Accounting, short paper about financial and managerial accounting also includes rules/regulations, CPA and CMA
Financial accounting involves the preparation of a business’s financial statements, mainly for users outside the business. These reports are used by owners, potential owners of a business, and by people who have loaned a company money. Some government agencies that regulate business and the stock market require companies to submit financial statements to them. Additionally, stockholders, suppliers, and banks also benefit from the financial reports that are generated. (Horngreen, Stratton, & Sundem, p. 5)
Managerial accounting helps managers plan and control a company’s operations. Accountants prepare budgets to express management’s goals in financial terms by identifying, measuring, accumulating, analyzing, interpreting, and communicating information. After a budget has been adopted, performance reports compare actual results with the budget. Cost accountants help management keep track of how much it costs a company to make the product, or provide the service, it sells. (Horngreen, Stratton, & Sundem, p. 5)
Rules and Regulations
In financial accounting, it is limited by a widely accepted set of rules, standards, and procedures for reporting financial information known as the generally accepted accounting principles (GAAP), as established by the Financial Accounting Standards Board (FASB). This standard requires that a company “account for all of their assets or economic resources according to their historical cost.” (Horngreen, Stratton, & Sundem, p. 6)
Managerial accounting does not require the implementation of the rules and procedures of the GAAP. Management of an organization can create any type of internal accounting system that will work best for their company. However, they need to be aware of the costs that the implementation of such a system. (Horngreen, Stratton, & Sundem, p. 6) They also need to take into account the information that needs to be kept. More than one set of records is usually the norm.
Both financial and managerial accounting must abide by the Foreign Corrupt Practices Act. This act is a “U.S. law forbidding bribery and other corrupt practices, and requiring that accounting records be maintained in reasonable detail and accuracy and that an appropriate system of internal accounting is maintained.” (Horngreen, Stratton, & Sundem, p. 7)
Financial accounting usually utilizes summary reports that are concerned primarily with the company as a whole. To contrast, managerial accounting uses more detailed reports which itemize parts of the company such as products, departments, and territories.
The use of performance reports is an important factor in financial accounting. These reports provide “feedback by comparing results with plans and by highlighting variances” (Horngreen, Stratton, & Sundem, p. 10) within the company. Managerial accounting mainly includes decision making – “the purposeful choice from among a set of alternative courses of action designed to achieve some objective.” (Horngreen, Stratton, & Sundem, p. 9) Focus on one of the two types of decision making, planning and control, is recommended for managerial accounting. (Horngreen, Stratton, & Sundem, p. 9)
Certified Public Accountant and Certified Management Accountant
Usually, one interested in financial accounting will earn the title of a Certified Public Accountant (CPA). This is obtained by “a combination of education, qualifying education, and the passing of a two-day written national exam.” (Horngreen, Stratton, & Sundem, p. 20)
Quality CPA auditors are very important to any business wishing to utilize their services and as a result, it is closely regulated in the United States by the American Institute of Certified Public Accountants (AICPA).
The Certified Management Accountant (CMA) was recently developed because of the increased interest for managerial accounting. This title is obtained by a very extensive examination covering topics such as economics, finance, management, financial accounting and reporting, management reporting, as well as decision analysis. (Horngreen, Stratton, & Sundem, p. 20) This designation is “the management accountant’s counterpart to the CPA.” (Horngreen, Stratton, & Sundem, p. 20) This designation is also regulated very closely by the Institute of Management Accountants (IMA).
Overall, financial and managerial accounting both are very important aspects of the business world. Most companies have some form of each type of accounting incorporated into their business operations. By following the appropriate standards for each, the company will be able to successfully keep track of their financial standing for internal as well as external purposes.
Horngreen C. T., Stratton, W. O., & Sundem, G. L. (2002). Introduction to Management Accounting (12th ed.). Prentice Hall: New Jersey.