Accounting incorporates various tasks that companies must perform to deal with financial transactions. This process involves recording, summarizing, analyzing, and reporting financial information. However, the most relevant branch of accounting is financial accounting. Within this branch, companies seek to prepare financial statements. These statements provide details of a company’s operations and activities for a period.
For most companies, accounting is a part of the finance department. This department is responsible for maintaining and handling financial records. Usually, it also overlooks other financial functions, such as budgeting, forecasting and capital decisions. However, this area does not fall under the scope of financial accounting. Companies perform this process internally and do not present this data for external usage.
Apart from financial accounting, the accounting field also incorporates many other branches or areas. One such area is managerial accounting, also known as the management accounting. This branch differs significantly from financial accounting. However, there are some overlaps within both areas. Managerial accounting has several features and characteristics that differentiate it from financial accounting.
The features and characteristics of managerial accounting are crucial to understanding its essence. However, it is vital to define what managerial accounting is first.
What is Managerial Accounting?
Managerial accounting is the branch of accounting that deals with the quality of information. This feature usually goes against the quantitative nature of financial accounting. However, that does not imply that managerial accounting does not focus on numbers and figures. Nonetheless, it focuses on the quality aspect more. Managerial accounting is primarily a part of the internal accounting process and function.
Managerial accounting applies various processes. It involves identifying, measuring, analyzing, interpreting and communicating financial information. However, as mentioned above, these processes occur internally. The flow of information within managerial accounting is from the accounting function to managers. This flow differs from financial accounting, where the end-users include internal and external stakeholders.
Managerial accounting also varies in its intended purpose from financial accounting. This branch covers the internal decisions made by managers based on accounting data. Since it does not require external usage, managerial accounting is more lenient with its processes. Nonetheless, it is a crucial part of a company’s accounting function. For companies, understanding this function and excelling at it can be critical.
Managerial accounting also encompasses various other areas. One of these includes cost accounting, which primarily focuses on establishing and controlling costs. Similarly, managerial accounting also helps companies prepare and support financial accounting processes. However, it does not focus on that area. Managerial accounting aims to improve the quality of the information provided to managers for decision-making.
Overall, managerial accounting is an accounting field that focuses on the internal flow of financial information. This field covers various tasks, such as recording, analyzing and communicating that information. For most companies, it is a critical area with high potential. Primarily, managerial accounting focuses on providing quality information to managers for decision-making. However, it also has other uses.
What are the features and characteristics of Managerial Accounting?
Every branch within accounting has its features and characteristics. These features set the branch apart from the others. For companies, it is crucial to understand them since it dictates the best usage for the specific accounting branch. The features and characteristics of managerial accounting differ significantly from other areas. More specifically, it is very different from financial accounting.
Some of the features and characteristics of managerial accounting include the following.
Covers future activities
One of the most critical characteristics of managerial accounting is its emphasis on future activities. As stated above, managerial accounting primarily covers the decisions made by managers. These decisions relate to a company’s future and its activities. Therefore, this branch primarily focuses on future activities. While it uses past results and figures, it still emphasizes future operations. Tools such as budgeting and forecasting are essential to this process.
Provides qualitative information
Managerial accounting focuses on qualitative information. Other accounting branches may cover figures and values. While managerial accounting also does that, it emphasizes the quality of the underlying data more. On top of that, managerial accounting only focuses on providing information. Interpreting and judging depend on a manager. Similarly, this branch does not make a decision. Managers do that instead.
Focuses on costs
Managerial accounting also includes cost accounting which primarily focuses on costs. This branch involves establishing products and various other types of costs. On top of that, it also requires controlling and reducing the existing expenses incurred for items. However, these usually apply to companies that manufacture products. While it may also have some applications to services, cost accounting is not as effective there.
Covers non-financial measures
Financial accounting primarily focuses on financial measures. While these can be highly crucial in analyzing financial information, it falls short in non-financial measures. However, managerial accounting covers it with various methods for measuring those stats. While these measures also require some financial figures, they reflect quality rather than values. This information can be highly crucial for decision-making.
Provides financial information
Managerial accounting does not involve the same activities as financial accounting. However, it serves as a supporting activity to the process. Managerial accounting helps companies gather the information that relates to financial activities. The primary emphasis during this process is to offer this information to managers. Consequently, managerial accounting helps managers make various decisions based on that information.
Utilizes various techniques and concepts
Managerial accounting provides managers and companies with various tools and techniques. These include standard costing, budgets, marginal costing, ratio analysis, responsibility accounting, etc. Usually, not all of these apply to every company. However, they are crucial in allowing companies to understand their activities better. On top of that, they provide a base for further analysis and enhance decision-making.
Does not involve standards or conventions
One of the most critical features of managerial accounting is not following standards or conventions. This feature differs from other accounting branches, such as financial accounting or auditing. There, companies must use specific standards which dictates their activities. However, managerial accounting is more flexible and allows companies to use tools accordingly. This feature can create some issues but can also enhance reporting.
Managerial accounting focuses on internal activities. It reflects on the procedures performed by companies to achieve specific objectives. During this process, it identifies weaknesses that may exist in those procedures. Consequently, it seeks to eliminate those inefficiencies and improve results. This way, companies can increase their performance with lower resources. Managerial accounting is crucial in improving efficiency.
Incorporates a high level of detail
Managerial accounting covers the quality of information rather than quantity. Consequently, it incorporates a high level of detail in the presented information. While managers can get information from other sources, they are not as comprehensive as managerial accounting. The detailed information provides a better basis for future decisions. On top of that, it also includes non-financial factors, as mentioned above.
Focuses on internal users
One of the primary features of managerial accounting is that it focuses on internal users. More specifically, it emphasizes providing vital information to managers. As mentioned above, this information forms the base for future decisions made by managers. Therefore, it is crucial in enhancing the quality of those decisions. Managerial accounting does not focus on external users. However, it is highly critical for internal use.
Managerial accounting is a branch of accounting that covers the flow of information internally. This branch is as crucial as financial accounting for most companies. Like other accounting branches, managerial accounting also has some qualities. These define how it differs from other areas. Some of the critical features and characteristics of managerial accounting are available above.