Chapter 1, Problem 1DQ

To determine

Indicate the major difference between financial accounting and managerial accounting.

Explanation of Solution

Financial accounting: Financial accounting is the process of recording, summarizing, and reporting all the transactions in the financial statement of the business over a period of time. The financial statement consists of the balance sheet, income statement, statement of retained earnings, and the cash flow statement.

Managerial accounting: Managerial accounting is the process of identifying, measuring, analyzing, interpreting, and communicating information which are designed to meet the goals of the organization.

The major difference between financial accounting and managerial accounting are as follows:

• Financial accounting is reported in the financial statement that is useful to external users as well as to the company management. Managerial accounting is only used by the management.
• Financial accounting information is objective in nature whereas the managerial accounting information is both objective and subjective in nature.
• Financial accounting guidelines are prepared according to GAAP guidelines. Managerial accounting guidelines are prepared according to the management needs.
• Financial accounting reports are prepared at fixed intervals and the managerial accounting are prepared at fixed intervals and on the basis of the requirement.
• In financial accounting, the financial statement is reported for the whole company whereas in the managerial accounting, the reports are reported either for whole company or for each segment.