What is the difference between financial and managerial accounting?

2. Description of managerial accounting

Managerial (management) accounting provides information that is useful in running a company by internal users.

Internal users of accounting information include management: executives, senior, middle-level, and lower-level managers, supervisors, clerks, salespersons, employees, etc. Because managerial accounting information is prepared for internal – not external – users, it does not have to be in conformity with generally accepted accounting principles (GAAP). Managerial accounting (i.e., internal) reporting is usually accomplished through custom designed reports.

Managerial accounting primarily uses present and future information. It looks at the lower levels of a company’s activities.

Managerial accounting is used for planning, control, and decision-making purposes. For example, managerial accounting information is used for:

  • Budgeting and forecasting
  • Determining and managing costs
  • Evaluating capital investments
  • Evaluating efficiency
  • Formulating strategies
  • Making decisions concerning product or service pricing, outsourcing, changing product mix
  • Measuring performance (e.g., organizational, departmental)
  • Optimizing operations
  • Planning and controlling activities

Managerial accounting utilizes both external (e.g., financial accounting) and internal (e.g., cost accounting) sources of information for planning, control, and decision-making purposes. For instance, there is an overlap between managerial and cost accounting: cost accounting information is used by management to make certain decisions. Thus, managerial accounting and cost accounting are linked as they use the same data to prepare budgets, performance reports, etc.

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