Types of Accounting

Financial Accounting

Financial accounting is a branch of accounting that focuses on creating information to report to external users. These users rely on standardized financial statements to make informed decisions about the organization.

• Examples of External Users:

  • Investors

  • Creditors (such as banks, bondholders)

  • Government agencies (such as tax authorities, regulatory bodies)

  • Other stakeholders (such as suppliers, customers, and the public)

• Laws/Standard Setting:

  • USA: Follows standards set by the Financial Accounting Standards Board (FASB), which issues the Generally Accepted Accounting Principles (GAAP).

  • International: Follows standards set by the International Accounting Standards Board (IASB), which issues the International Financial Reporting Standards (IFRS).

Key Points:

• Purpose: To provide standardized financial information to parties outside the organization.

• Regulation: Highly regulated and must comply with established accounting standards (GAAP or IFRS).

Example:

A company prepares its annual financial statements (income statement, balance sheet, cash flow statement) according to GAAP to present to shareholders and file with the Securities and Exchange Commission (SEC).

Managerial Accounting

Managerial accounting is focused on creating information to report to internal users within the organization. The information is used for planning, controlling, and decision-making purposes.

• Examples of Internal Users:

  • Management (executives, department heads)

  • Marketing teams

  • Other internal decision-makers

• Laws/Standard Setting: There are no mandatory standards for managerial accounting; companies develop their own systems to meet internal needs.

Key Points:

• Purpose: To assist management in planning, controlling operations, and making strategic decisions.

• Regulation: Not regulated by external standards; flexible and tailored to organizational needs.

Example:

A company's management accounting team prepares a monthly budget report to help department heads monitor expenses and adjust operations as needed.

Comparison of Financial and Managerial Accounting

• Financial Accounting: External focus, regulated by standards (GAAP/IFRS), periodic reporting (quarterly/annually).

• Managerial Accounting: Internal focus, not regulated, reports as needed (daily, weekly, monthly).