Wednesday, May 25, 2022

FINANCIAL vs MANAGERIAL Accounting

In this video you'll discover the similarities between managerial accounting and financial accounting then I'll give you five major differences that separate these two practices hey viewers I'm James and welcome to accounting stuff the channel that teaches you everything you need to know .

About counting and bookkeeping since I started this channel a few months ago the focus here has really been on accounting basics I've put together a playlist covering accounting for beginners style topics we've done the accounting equation assets liabilities and equity debits and credits and then we've talked about how these areas can .

Be linked together to form financial reports like the income statement the balance sheet and the cash flow statement all of these topics have one thing in common they fit under the umbrella of financial accounting but counting is much much bigger than just financial accounting you can think of it as a tree .

With many branches and one of these branches is managerial accounting until now I haven't really touched on this topic I've received a bunch of requests for it from you guys down in the comments so thanks for these I value your feedback and it's always helpful for me to see what content you'd like to see featured on this channel personally .

I find managerial accounting fascinating for many reasons that you'll soon discover so I'm going to create a new playlist dedicated to this topic I'm going to keep adding to overtime so subscribe and hit the bell to be notified when those videos come out we've got plenty to cover but anyway in this video it seems logical to start off .

With a question of what managerial accounting actually is and how is it different from financial accounting like I said at the start you're going to find out the similarities and differences between these two branches of accounting and don't get to watch this through until the end because I'll be sharing my thoughts on which is better let's do .

This I want to kick things off with a couple of definitions financial accounting is the process of recording summarizing and analyzing an entity's financial transactions and reporting them in financial statements to its existing and potential investors lenders and creditors on the other hand managerial or management accounting is .

The process of identifying measuring interpreting and communicating information to management to assist them in planning decision-making and risk management hmm if that doesn't make a whole lot of sense to you then honestly I don't blame you trying to summarize two broad practices into just a couple of .

Sentences is a difficult task I think it's easier to build a picture of these two branches of accounting by looking at their similarities and their differences so how are they similar well like I just mentioned they're both branches of accounting accounting which has been referred to as the language of business is a huge field of study that .

Can be divided up into several different practices things like financial accounting managerial accounting tax accounting audit bookkeeping and forensic accounting are all different branches of the same tree and financial and management accounting are just two of those branches they also both involve collecting financial information and .

Presenting it to their target audience in the form of financial reports but who is the target audience and what financial reports we'll get into that now as we talk about the five differences between financial and managerial accounting difference number one who is the target audience in financial accounting the target audience .

Is external and in managerial accounting its internal let me explain how that works both the Financial Accounting Standards Board and the International Accounting Standards Board who respectively come up with US GAAP and IFRS stay that the primary users of financial statements are an entity's existing and potential investors lenders .

And creditors that's because the main objective of financial accounting is to report on a business's financial health to these external parties that's not say that other groups of people like Management regulators and the public won't find financial statements useful but keep it in mind that existing and potential investors lenders and .

Creditors are the main reason why financial statements exist to protect these external parties that are funding or potentially going to fund the business in contrast to this in managerial accounting the target audience is all internal the main objective here is to create internal reports to help the managers within the .

Business plan for the future make informed business decisions manage risks which in turn will impact on performance and profitability okay so now for difference number two outlook when it comes down to it Financial Accounting involves reporting on past transactions and events whereas managerial accounting is more focused on .

The future financial accountants put together reports like the income statement and the balance sheet to summarize transactions that happened over a period of time or the closing balances of assets liabilities in equity at a single point in time in the past this period of time or point in time that we're talking about is always in .

The past and its historical information that financial accountants rely on to build these financial statements on the contrary management accountants make reports to help management make decisions that impact the future like budgets or forecasts which determine how a business chooses to allocate its resources next up I'd like to talk about .

Scope because this is completely different for both of these accounting branches in financial accounting the scope is broad financial statements consolidate the results of all of the different departments and business units so that external parties can get an understanding of the big picture of the whole business meanwhile in management .

Accounting the scope is much more narrow management accountants like to slice a company up into different segments divisions and cost centers to provide the managers of all of these different areas with detailed reports to help them specifically these reports might not be limited to financial information either they might contain non-financial .

Information like detailed commentaries or explanations to help support the data by telling the story and that leads me nicely into difference number four priority in financial accounting the focus is always on being objective and precise financial statements are meant to reflect a true and fair view of the business's state of affairs at the end .

Of an accounting period no guesstimate allowed here go to managerial accounting the priority is on being relevant and timely what uses a super accurate report if it comes to a manager too late and isn't relevant anymore for this reason management accountants are given more leeway to use estimates and shortcuts if it means that they can .

Deliver their analysis on time estimates and shortcuts it sounds a bit dodgy a dank management accountants have some rules to follow not really because their reports and analysis are confidential and for internal use only management accounting is less regulated than financial accounting there's no framework to .

Follow so their reports can take on whatever format they like however financial accounting is heavily regulated remember when I talked about GAAP in IFRS earlier on well these are the principles and standards that financial accountants have to adhere to GAAP and IFRS lay out a strict roadmap that show us how we should record .

Transactions and present that information in financial statements like the income statement the balance sheet and statement of cash flows and that's no wonder it's since the users of these statements are external they need to be protected from fraud and misinformation and on top of that financial statements sometimes need to be audited audit it's .

A completely different branch of accounting where business hires an independent external group of accountants whose job it is to review and check over financial statements before they can be approved and sent out to the external lenders and investors now at the start of this video by promised t5 differences as a little .

Bonus to you I've got one more difference number six are they even necessary management to financial accountants who needs them this one's nice and simple financial statements and therefore financial accountants become essential once a business grows above a certain threshold this unique to your country whilst management accountants .

Are technically not required you can think of them more as a luxury that companies don't necessarily need although they can be extremely valuable when it comes to making decisions about strategy in the future so which is better that is a very hard question and probably a silly one for me to have even .

Brought up in the first place but I have a crack at it I think it really comes down to who you are as an external investor you'd obviously value financial accounting more because the internal reports created by management accountants are confidential so you never see them that being said you would hope that the business is making use of .

Managerial accounting plan for the future make informed decisions and reduce risks where possible for most financial accounting is an absolute necessity however managerial accounting can be extremely valuable when it comes to impacting future performance and profitability thanks for watching if you .

Found this video useful give the like share it comment and subscribe for more managerial accounting tutorials as always if you've got any questions let me know down below in the comments or message me directly on instagram at accounting staff to a next time

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