There are two major types of accounting which include financial accounting and managerial accounting.
Let’s take a look at the different functions and responsibilities of these two types of accounting.
Financial Accounting:
Data: Collection of data on daily transactions in the current year.
Responsibilities: Responsible for preparation of the published annual and quarterly reports including Final Accounts: Profit and Loss Account (P&L Account), Balance Sheet and Cash Flow.
Access to information: The information from the Final Accounts is used by external stakeholder groups such as current shareholders, banks, competitors, potential investors, competitors, etc.
Time: Financial Accounting covers past periods of time.
Frequency: The Final Accounts are usually prepared once a year and every quarter.
Legal requirements: Accountants are bound by the rules and concepts of the accounting profession. Every company’s Final Accounts must observe all the legal requirements.
Managerial Accounting:
Data: Preparation of information for managers on any financial aspect of the business, its departments and products.
Responsibilities: Responsible for analyzing internal accounts such as departmental budgets.
Access to information: The information is only made available to managers of the business and other internal users such as The Board of Directors.
Time: Managerial accounting can cover past time periods, but can also be concerned with the present as well as projections into the future.
Frequency: Accounting reports and quantitative data are prepared as and when required by managers and directors.
Legal requirements: There are no set legal rules therefore managerial accountants will produce information in the form requested.
In general, financial accountants prepare the formal published Final Accounts of the business. These documents must be aligned with all legal requirements as they are audited by the outside firms such as the ‘Big 4’ accounting firms including Deloitte, PwC, Ernst&Young and KPMG. These large firms completely dominate the auditing industry auditing over 80% percent of all US public companies.
While managerial accountants prepare informal reports for internal use within the business. Directors and managers who need financial information to control the business on daily basis and make future decisions to guarantee success.
