The first question, "What is the difference between financial accounting and managerial accounting?" is
fundamental to understanding the diverse roles that these two branches of accounting play within an
Financial accounting is primarily concerned with the preparation and reporting of financial information
to external stakeholders, such as investors, creditors, government agencies, and the general public. Its
primary purpose is to provide an accurate and transparent picture of a company's financial performance
and position. Here are some key characteristics and functions of financial accounting:
1. **External Reporting:** Financial accountants compile and present financial statements, including the
income statement, balance sheet, and cash flow statement, to external parties. These statements are
subject to strict accounting standards (such as Generally Accepted Accounting Principles, or GAAP) to
ensure consistency and comparability.
2. **Historical Focus:** Financial accounting typically deals with historical data, summarizing past
financial transactions and events. It is backward-looking and emphasizes objectivity and accuracy.
3. **Regulatory Compliance:** Publicly traded companies are required to follow specific regulations, like
the Sarbanes-Oxley Act in the United States, to ensure the integrity of financial reporting.
4. **External Audits:** Financial statements are often subject to external audits conducted by
independent auditors to verify their accuracy and compliance with accounting standards.
5. **Main Users:** The primary users of financial accounting information are external parties, such as
shareholders, banks, regulatory bodies, and potential investors. It helps them assess the company's
financial health and make informed decisions.
Managerial accounting, also known as cost accounting, is focused on providing internal decision-makers,
including management and executives, with relevant financial information to support planning, control,
and decision-making within the organization. Here are some key aspects of managerial accounting: