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Financial vs. Managerial Accounting

Accounting practices can be divided into two broad areas of function: financial accounting and managerial accounting. Both areas are dependent upon a strong information system that can reliably capture and summarize personal and business transactional data. At the heart of all accounting practices and procedures is a basic understanding of assets and liabilities (debts). However, with the advent of computers and sophisticated software capability, tedious bookkeeping tasks largely have been relegated to the annals of history, and replaced with software programs with dynamic, proactive decision-making capability in the field of financial and managerial accounting.

Financial accounting concerns itself with external reporting of information to parties outside of the subject business or entity. To ensure consistency and structure in reporting, financial accounting is managed by many rules or standards, such as those developed by the private sector group called the Financial Accounting Standards Board (FASB) (see below). Fi-nancial reports prepared under these standards have a general-purpose orientation with which all intended user groups are familiar, thus rendering the reports ostensibly neutral and free from bias. Most earnings reports are based on these established measurement and reporting rules, known as generally accepted accounting principles (GAAP)(see below).

In contrast, managerial accounting benefits internal management of an entity by providing information that will assist in planning, controlling, and decision-making. In contrast to financial accounting, internal management accounting dictates its own information needs and specifies the way that data is accumulated and presented. It need not follow any particular rules or guidelines, as its intended purpose is for internal decision-making.


Inside Financial vs. Managerial Accounting