What is the difference between financial accounting and management accounting?

Financial accounting has its focus on the financial statements which are distributed to stockholders, lenders, financial analysts, and others outside of the company. Courses in financial accounting cover the generally accepted accounting principles which must be followed when reporting the results of a corporation's past transactions on its balance sheet, income statement, statement of cash flows, and statement of changes in stockholders' equity.

 

Managerial accounting has its focus on providing information within the company so that its management can operate the company more effectively.  Managerial accounting and cost accounting also provide instructions on computing the cost of products at a manufacturing enterprise. These costs will then be used in the external financial statements. In addition to cost systems for manufacturers, courses in managerial accounting will include topics such as cost behavior, break-even point, profit planning, operational budgeting, capital budgeting, relevant costs for decision making, activity based costing, and standard costing.

 

How can I get a basic understanding of cost accounting?

To get a basic understanding of cost accounting I recommend reading the managerial accounting topics found in the second half of an introductory accounting textbook. Such a textbook is often 1,200+ pages in length since it covers both financial and managerial accounting. (A textbook containing only financial accounting topics is not helpful.) A person in the U.S. should be able to obtain a 5-year-old edition of a 1,200-page introductory accounting textbook from a reseller on Amazon.com for approximately $5.

Generally the authors of these introductory accounting textbooks will present simpler examples and explanations than those found in managerial accounting textbooks or in cost accounting textbooks. This should make it easier to gain a basic understanding of important cost accounting concepts. Armed with this understanding, you can then return to the cost accounting textbook to tackle the more complicated issues and problems.

I believe that the introductory accounting textbooks, the managerial accounting textbooks, and the cost accounting textbooks will present 15 common cost accounting topics with varying degrees of depth and complexity.

What is managerial accounting?

Managerial accounting is also known as management accounting and it includes many of the topics found in cost accounting.

Some managerial accounting topics focus on computing a manufacturer's product costs that are needed for the external financial statements. For example, the manufacturer's income statement must report the actual cost of the products sold, and its balance sheet must report the actual costs in its ending inventories. The managerial accounting topics needed for these calculations include: product vs. period costs, job order costing, process costing, allocation of manufacturing overhead, costing of joint products, and more.

Other managerial accounting topics are more beneficial for planning and controlling a business and in helping management make financial decisions. These topics include:

·         understanding cost behavior and cost-volume-profit analysis

·         operational budgeting and capital budgeting

·         standard costing and variance analysis

·         activity based costing

·         pricing of individual products and services

·         analyzing the profitability of product lines, customers, territories, etc.

 

The appropriate and relevant amounts for these topics will likely be unaudited, estimated, and future amounts (instead of the past, sunk costs found in the general ledger). Management's focus on these managerial accounting topics can make a difference in a company's profitability.

 

 

What is accounting?

Accounting is the recording of financial transactions plus storing, sorting, retrieving, summarizing, and presenting the information in various reports and analyses. Accounting is also a profession consisting of individuals having the formal education to carry out these tasks.

One part of accounting focuses on presenting the information in the form of general-purpose financial statements (balance sheet, income statement, etc.) to people outside of the company. These external reports must be prepared in accordance with generally accepted accounting principles often referred to as GAAP or US GAAP. This part of accounting is referred to as financial accounting.

Accounting also entails providing a company's management with the information it needs to keep the business financially healthy. These analyses and reports are not distributed outside of the company. Some of the information will originate from the recorded transactions but some of the information will be estimates and projections based on various assumptions. Three examples of internal analyses and reports are budgets, standards for controlling operations, and estimating selling prices for quoting new jobs. This area of accounting is known as management accounting.

Another part of accounting involves compliance with government regulations pertaining to income tax reporting.

Today much of the recording, storing, and sorting aspects of accounting have been automated as a result of the advances in computer technology.

Where can I find financial ratios for my industry?

One source for financial ratios by industry is the RMA Annual Statement Studies Financial Ratio Benchmarks. RMA is the acronym for Risk Management Association and formerly for Robert Morris Associates. Your banker and many larger libraries subscribe to this publication. It contains the financial ratios for 740 industries based on the financial statements of more than 265,000 small and mid-sized companies.

Another source for your industry's financial ratios is your industry's trade association, if it collects financial information from its members.

In addition to comparing your company's financial ratios to its industry, you will want to compare your company's financial ratios to its own past and future financial ratios. Spotting a trend early can be very beneficial.

What is the difference in salaries between a bookkeeper and an accountant?

I  estimate that a bookkeeper's salary will be less than half of an accountant's salary. For example, an accountant with a year or two of experience might earn $60,000 per year while a bookkeeper will earn less than $30,000 per year. More experienced accountants will be able to earn higher salaries but bookkeepers will not see significant salary increases. Some explanations for the salary differences are listed below.

Generally, a bookkeeper's formal education will be less than a four-year college degree. Accountants generally have a 120 or 150 credit college degree including at least 30 credits of accounting courses plus 30 credits of other business courses.

A bookkeeper is likely to be employed at a smaller company or organization and will process a large volume of routine transactions. An accountant is likely to be employed at a larger company and will be able to delegate the processing of the high-volume routine transactions to accounting clerks. In turn, the accountant will deal with more complicated transactions, will review the financial statements, and will assist management in the planning and control of the organization.

 

How do the responsibilities of a bookkeeper differ from those of an accountant?

I see a bookkeeper's responsibilities as getting the business transactions into the company's general ledger. This involves a tremendous amount of accuracy and persistence in first getting the information and then getting it entered. At smaller companies the bookkeeper is likely to process the payables (receiving suppliers' invoices, verifying them, and remitting the amounts), receivables (billing customers, processing receipts, sending statements), payroll, and other tasks. In larger companies, the bookkeeper's responsibilities are likely to be assigned to an accounts payable clerk, an accounts receivable clerk, and a payroll clerk. Generally, the bookkeeper (or accounting clerks) will not have a four-year accounting degree and will be paid considerably less than an accountant.

Accountants will review the information that the bookkeeper had entered into the general ledger, will prepare adjusting entries, will prepare the financial statements, and will analyze them. The accountant will likely supervise the bookkeeper (or accounting clerks), will be involved in the accounting system, and will review the financial statements with the management and owners of the company. The accountant will also be involved in budgeting of operations and capital improvements, cost accounting, reports to government agencies, and various analyses required by management. Generally, the accountant will have a four-year or a five-year college degree with a major in accounting.

Of course my remarks are a broad generalization. Responsibilities will vary by company and by individual.