Money Mondays

Fundamentals of business financial is needed to keep track and be productive

Financial accounting is measuring and recording business transactions and providing financial statements and providing financial statements that are based on generally accepted accounting principles. It focuses on external reporting. The object of financial accounting is to assist accountants in their stewardship function: the safeguarding of the organization’s assets. The central outputs of financial accounting are audited financial statements such as balance sheets and income statements. Financial accounting is oriented toward providing information to individuals outside the firm, e.g., prospective shareholders.

By contrast, managerial accounting measures and reports financial and no financial information that helps make decisions to fulfill the goals of an organization. It focuses on internal reporting. The tools used by managerial accountants to achieve their goal of decision support are such things as budgets; activity based costing and financial planning. Managerial accounting is designed for internal use by a firm’s managers.

Neither financial nor managerial accounting is a subset of the other. They each have a distinct purpose and audience. Financial accounting reports are meant to give capital providers a means of assessing how well that capital has been used. As such, they are backward looking, based of historical accounting data and designed to provide a broad assessment of organizational performance. In the private sector, generally accepted accounting principles have been developed and are required to ensure consistency in reporting across organizations.

By contrast, managerial accounting, with its focus on decision support, is forward looking. Given the dynamic and idiosyncratic needs of its audience of operational managers, there are no standard rules in managerial accounting. But many tools have been developed that have proved useful in decision support, such as activity based costing and capital budgeting.

Costing is another major area of difference between financial and managerial accounting. Accurate costing all the way down to the product, unit, service, or activity level is a prerequisite for effective decision making and efficient resource allocation. But in aggregate financial reporting, only the totality of expenses is needed to calculate net income and so accuracy at the product or activity level is irrelevant: After costs have been incurred, the totals remain the same, however costs are allocated.

Most organizations need to have both an internal and an external focus and so must pay attention to the adequacy of both their financial and managerial accounting systems. However, often demands of external capital providers speak louder than the needs of internal managers, a phenomenon exacerbated by the concentration of the training most accountants have in financial accounting over managerial accounting.

Establishing the difference between financial and managerial accounting will give accountants a competitive advantage for a company.

It's time to define and focus on the necessary areas, which cause improvement in systems. Prepare yourself for next year to make it rewarding to your employees, stockholders and self.

Be inspired,
Bahiyah Shabazz