The difference between financial accounting and managerial accounting and the relationship between them

The difference between financial accounting and managerial accounting and the relationship between them

share this content

Reading Time: 6 minutes

The field of accounting has a broad scope within which many financial and administrative concepts and terminology are concerned, including the type of different financial reports, the basic objectives of each term, the target audience, and the time span of each plan.

Financial accounting and managerial accounting are two different fundamental aspects of the broad accounting world, as financial accounting is one of the key accounting systems that play a vital role in understanding and documenting the financial activities of companies and enterprises, while managerial accounting is concerned with providing accurate information by analyzing financial statements within the company to assist in administrative decision-making.

Managerial accounting differs from financial accounting in the sense of the concept, basic principles, basics for financial reporting, and analysis of the statements in order to achieve the desired results, and the details of these differences and their thrusts are set out below.

The concept of financial and managerial accounting

Financial accounting is defined as one of the fundamentals of accounting work, which is to analyze and classify all financial operations within the company during the accounting period between the company and other institutions for the preparation of periodic financial reports based on previous financial statements.

Managerial accounting is concerned with cost management and analysis, performance monitoring, and studying other information resulting from other subsystems within the company in order to provide internal reports that help management make daily decisions that in turn affect the conduct of internal operations based on past and future financial statements.

The difference between financial accounting and managerial accounting in terms of principles

The difference between financial accounting and managerial accounting can be identified in terms of the foundations on which each of them is based, and the following is explained in detail:

Financial accounting principles

The following are the principles of financial accounting and the basis on which their financial lists are prepared:

  • The principle of recognition of income provides for revenue to be recognized as earned, recorded in the accounting records, and not recorded in the financial statements.
  • Cost principle, which reflects the value of expenditures to be recorded and recognized over time for appropriate positions (i.e., the expendable asset is spent over its productive life).
  • The principle of conformity, which is concerned with recording revenues and expenses in the same period as they are incurred, also examines the conformity of revenues and expenses according to the accrual basis of the company.
  • The principle of full disclosure, through which the financial statements are prepared using the Financial Accounting Guidance, which explains the financial position of the company in a transparent and clear manner,.
  • The principle of objectivity, through which a set of financial statements is prepared objectively through the very accurate financial statement numbers resulting from the actual performance of the company,.

managerial accounting principles

The principles of managerial accounting and the well-established foundations for their financial statements are as follows:

  • The wealth of information that characterizes managerial accounting is the abundance of very accurate information because the company will rely on it to issue important reports later.
  • The measurement and matching principle ensures that data derived from financial accounting and cost and tax accounting are consistent with the needs of management and are controlled for administrative purposes and significant financial decisions.
  • The precautionary principle, through which reports and statements submitted to the managerial accountant are verified and validated, is to avoid making wrong decisions that have a negative impact on the performance of the company.
  • The principle of objectivity reflects the need for the financial information provided to be objective, not influenced by individual opinions, and based on actual data.

Objectives of financial accounting and managerial accounting

The objectives that company leaders aspire to differ from both financial accounting and managerial accounting, as explained below:

Financial accounting objectives

The objectives of financial accounting are as follows:

  • Establish a standard set of rules for the preparation of financial statements and clarify them over time, as well as for the preparation of financial reports.
  • Risk reduction through financial reporting, study, and clarification of profit and loss ratios using deliberate methods that hold companies accountable for their performance.
  • Provide management with insight into its financial performance by presenting strategic concepts when analyzing financial results and making decisions.
  • Enhance confidence in financial reporting, as independent governing bodies are responsible for financial accounting rules, making the basis for reporting independent of management and a very reliable source of accurate information.
  • The company’s liquidity assessment, knowledge of its assets, and comparison with its liabilities.
  • Solve financial problems on the basis of neutral financial statements.
  • The company’s overall performance calendar.
  • Preparation and external involvement of core financial lists, such as financial position lists and income lists.

Managerial accounting objectives

The following is an explanation of the objectives of managerial accounting, which is a fundamental difference between financial accounting and managerial accounting:

  • Planning and forecasting in order to determine the financial direction of the company in the coming months and years through the income and cost projections contained in these plans.
  • Establish a detailed budget that includes costs and investments to be made in the future and projections for the purchase of new equipment in order to increase the company’s future performance.
  • Analysis of the cost and return of new projects and submission of ongoing reports of existing projects, with a view to controlling expenditures and potential debts, to ensure that such projects are delivered in a timely manner within budget.
  • Performance measurement and tracking are necessary to help the company make decisions in a timely manner, avoid costly abuses, and allow the company to remain competitive in the middle.
  • Prior solutions are found to prevent financial problems to the extent possible.
  • Motivate the company and its employees to achieve its goals and future vision.
  • Evaluation of the performance of units and departments within the company in particular.

Lists of financial and managerial accounting

The lists prepared on the basis of financial and managerial accounting can be compared as follows:

Time to prepare lists

Companies prepare lists of information in financial accounting continuously and periodically at the end of each certain period of time determined by the company according to its business strategies and products, while in managerial accounting, accounting information and financial statements are prepared when the company needs them and upon an official request.

Review of lists

Financial statements issued on the basis of financial accounting are subject to external scrutiny and audit (i.e., third parties), and managerial accounting lists are subject to scrutiny, audit, and audit by the auditor within the same company.

Mandatory issuance of lists

Companies are required to issue financial statements issued by financial accounting annually to present the company’s performance clearly, and this is not required in the lists of managerial accounting.

Methods used to prepare lists

The preparation of financial statements by financial accounting is primarily based on mathematical, accounting, and statistical methods, which is one of the salient differences between financial and managerial accounting.

While lists of managerial accounting depend on creativity, analysis, and speed in understanding numbers using the following methods:

  • The budget method provides comprehensive management plans and programs for all expected processes and results in a specified period of time.
  • Sales and profit planning method using break-even analysis, for which a company’s access indicates parity of total revenue with total costs, if the company does not earn profits or losses, and if production falls below the equivalence point, the company loses as much as it does away from the equivalence point.

How the Qoyod accounting system is useful in financial and administrative accounting reports

The Qoyod cloud accounting system helps in providing all the financial data that financial accounting needs to prepare financial statements and reports in any period of time to reach the real results that the company will display and give it a picture of its financial situation.

As for the role of the Qoyod accounting program in managerial accounting, it is to provide previous data for the company’s work and the necessary reports and link all departments of the company to each other in order to make accurate decisions regarding the financial situation of the company.

In conclusion…

Make sure that financial statements based on the basis of financial accounting are prepared annually in the best manner and techniques so that you can have an insight into the overall performance and evaluation of the company, reduce the financial risks of the company, and assess the new company's budget in accordance with its performance and financial situation.

Make sure to prepare management accounting statements every period so that you can build a clear picture of the company’s past financial situation and the expected future, evaluate the performance of departments and administrative units in it, analyze the costs and returns of new projects, and develop prior solutions to prevent financial problems.

Activate the Qoyod accounting system to be your ideal companion as one of the best cloud accounting programs in the Kingdom of Saudi Arabia, and make it the easiest way to help you prepare lists and reports emanating from financial accounting and managerial accounting in the company. Make 14 days your way to change, facilitate, and make the company’s accounting system more accurate.

Tags

Register in Newsletter !

The most important news and stories for entrepreneurs

More contents from qoyod

Accounting software for groceries - Qoyod
Qoyod sectors

Accounting software for groceries

Innovation and rapid development extend to all fields, whether economic, social, or even personal. In our fast-paced modern world, the technological sector is witnessing great progress that casts a shadow on all aspects of life, and this progress contributes to improving

اقراء المزيد

Start your Free Trial !

Easier accounting