If you are a student of Accounts and Finance, then the concept of accounting principles should be very familiar with you. Terms such as cost accounting, statement analysis and valuation must be everyday common language when you speak to your peers at school.
For a student of accountancy, or for someone who loves finance, accounting is much more than book keeping and number crunching. You will be surprised to know that accounting is what drives businesses to growth and the entire global economy to greater heights.
There are multiple accounting types and systems. And, even though they may all employ the same accounting systems, each realm has its trademark and distinct focus. Let us look at some of the most popular types:
- Financial Accounting: This involves recording and documenting all business-related transactions.
- Cost Accounting: A very common type of accounting used in the manufacturing industry, it helps to record transactions in a business with multiple costs and huge operational scale.
- Management Accounting: Managerial accountants provide data to business heads on the company's performance based on financial reports and decisions.
- Tax Accounting: This is simply the planning and preparing for tax liabilities and adhering to tax laws and policies.
- Forensic Accounting: This branch of accounting mainly concerns itself with legal affairs like investigating frauds or claims settlements.
- Fiduciary Accounting: A fiduciary accountant manages any account and activities in relationship to the administration and guardianship of a property.
Most business prefer to keep an in-house team of accountants. This is primarily due to the sensitive nature of corporate finance. Financial accountants and management accounting are dedicated to a single company’s financial health and growth, unlike other forms of accounting. Although they may function in tandem, they each have a distinct role to play in the corporate financial structure.
The difference between managerial and financial accounting is that financial accounting is the collection of accounting data to create financial statements, while managerial accounting is the internal processing used to account for business transactions.
Financial accountants are a legal requirement, while management accounting is needed for more internal purposes of business. There other critical differences between managerial and financial accountants.
Management Accounting Definition
Managerial or management accountants use the provision of accounting information to gain knowledge and information that drives their decisions and recommendations for performance management and budget controls.
What is Financial Accounting?
Simply put, financial accountants prepare summaries, analyses, and reports of financial transactions in a business, with the help of financial statements.
Learn more about the role of management accounting in decision-making here.
Differences in Reporting Structure
One of the fundamental differences between a managerial and financial accountant lies in who they report to and how.
Whereas, financial accountants report to external stakeholders of the company like shareholders, creditors, investors and to the tax authorities, managerial accountants, in contrast, report only to managers and, perhaps, company employees.
Objectives of Financial Accounting
Financial accountants form the backbone of a business. They have the very important job of maintaining all finance-related data in business. The main objectives a financial accountant pursues, include:
- Tracking, identifying, and documenting all transactions.
- Ensure legal and statutory compliances.
- Support other accounting with relevant information and financial data.
- Protect stakeholders' interests by furnishing financial reports from time to time.
- Control financial policies in an organisation.
- Internal auditing.
Objectives of Management Accounting
Management accountants critical contributors to a business, who directly impact company finances, business growth and expansion, and innovation and scale. Their role comes with some important objectives and purpose:
Decision-making, that is based on financial forecasts and data analysis.
Risk analysis and mitigation strategies that helps a company prepare in advance for any adversities that may arise in the future.
In-depth market research to identify trends and opportunities that can open up doors for innovation, outreach, and scale.
Maintain all company finance-related data to help in drafting the financial report at the end of the year for purposes of financial accounting.
Ensure and monitor budget compliance with all verticals in a company.
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Differences in Roles of Managerial and Financial Accountants
While it is a fact that the accounting profession is not glamorous, there is a certain cachet to accountancy, especially if you are a management accountant. You stand a chance to become a company planner and risk manager should you decide to embark on this journey.
A managerial accountant is tasked with resolving the important questions around-
- Is this the right time to go global from local?
- How big, if at all, can the company's operational scale be?
- Manufacture and market a new line of products?
- How can employees become more productive?
All of this is predicated upon the analysis of the senior management accountant. A managerial accountant is more like an advisor to founders, directors, and CEOs. If the findings of management accountant's report recommends expansion, the company will easily say yes to it, while accounting for other considerations as well.
On the other hand, if things go out of hand; maybe the move proves too costly, it would be the managerial accountant’s job to bring that accounting information to those in power.
The role of financial accountants, on the other hand, is most useful in preparing sound financial statements that reflect the financial well-being (or otherwise) of a business. They too function as an internal control, but in a different way than managerial or cost accountants.
They account for critical component in the balance sheet that include revenue, expense, asset, liability, and equity. Unlike managerial accountants, a financial accountant's job is more cut-out and narrowed down to creating income statement, cost statements, and balance sheets.
Check out market opportunities for the two types of accounting in the market.
Similarity in Rules Followed by Managerial and Financial Accountants
Management accountants may serve different purposes than a financial accountant, but at their core, they use the same accounting information systems, albeit for different purposes.
In addition, they both are legally required to follow the Generally Accepted Accounting Principles (GAAP), India. It is a set of rules that form the foundation of any accounting type and role in India.
In terms of the International Financial Reporting Standards, if the company is a global enterprise, then it legally requires the financial accountant to follow the standards. This is however, not true for managerial accountants. The latter are not compelled to follow that standard. This said, more and more companies, whether international or not, are moving toward those accounting practices simply to streamline accounting concepts.
The two types of accounting also depend on each other heavily for information and data gathering. Managerial accountants, for example, use the accounting process to plan strategic moves and make recommendations to the top management in order to optimise financial performance. Performance management, increments, laying off employees are just some examples of such recommendations being translated into action.
Financial accountants are more concerned with the accounting cycle or the recording of complete accounting events. Through a process of accrual accounting, they record transactions even before it happens in reality. In fact, the GAAP mandates large companies to use the accrual method in preparing their financial statements.
While financial accountants do not directly participate in the decision-making process, unlike managerial accountants are, but they have the important job of setting standards and controls that the entire company adheres to.
In light of this, it is easy to consider a career in any type of accounting. But the ones in managerial or financial accounting seem rather attractive. Especially if you are someone who is drawn to trend analysis and number crunching. then this is definitely a career move or opportunity to consider.
Working as a professional accountant in such a business environment may not bring the thrill that being an auditor might bring, but there is a measure of safety – as opposed to going into business for yourself. Being a financial accountant will help you contribute to the well-being of the business by honing skills that require excellent research and analytical skills.
Managerial accounting, on the other hand, will give you a broader spectrum to apply these skills. The pride and responsibility that comes with the job of informing major business decisions that impact its future, are sure to lure you into an accounting course right away!
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