For the most part, accounting is a somewhat “technical” discipline. The majority of people who study accounting in college likely would never have done so if it weren’t for the promise of a career in finance and business management.
Yet, we all use accounting information daily to help us make decisions with our money and better understand what is going on with our businesses. If you are looking at which type of accounting is right for your business, here is a short financial and managerial accounting breakdown.
Financial Accounting: The Technical Side
Financial accounting is all the information from the basic accounting equation: Assets − Liabilities = Owners’ equity.
These three account types are where financial accounting gets its name. So when you hear someone talking about how they look at their “books,” they are talking about the financial accounting system, which records all of these transactions.
The financial accountant can tell you how much your business owns and owes and generates reports on other important information such as Cost-of-Goods-Sold or Gross Margin.
Managerial Accounting: The Practical Side
While financial accounting is excellent at telling you what the business owns and owes, it doesn’t tell you very much about how well your business is using all of those assets. For instance, it tells you nothing about how profitable each of your products is or whether or not certain expenses are too high compared to others.
Managerial accounting was initially developed for businesses to help them better determine how much resources their business was using so that managers could make the best use of those resources.
Which to Choose?
When choosing which type of accounting system to focus on investing in, you have to consider that managerial accounting systems are much more complicated and require a lot more data entry for each transaction.
On the other hand, financial accounting is much easier to implement and use since all of the information you need has already been collected in your financial system’s general ledger.
The best strategy is likely a bit of both, with a stronger emphasis on managerial accounting.