What is the purpose of financial management what is the difference in perspective between finance and accounting?

Financial accounting and managerial accounting are two of the four largest branches of the accounting discipline (e.g. tax accounting and auditing are others). Despite many similarities in approach and usage, there are significant differences between the financial and managerial accounting. These differences primarily center around compliance, accounting standards, and target audiences.

• Managerial accounting is the practice of identifying, measuring, analyzing, interpreting, and communicating financial information to managers for the pursuit of an organization's goals.
• Financial accounting involves recording, summarizing, and reporting the stream of transactions and economic activity resulting from business operations over a period of time to the public or regulators.
• Managerial accounting differs from financial accounting because the intended purpose of managerial accounting is to assist users internal to the company in making well-informed business decisions.

The main objective of managerial accounting is to produce useful information for a company's internal use. Business managers collect information that encourages strategic planning, helps them set realistic goals, and encourages an efficient directing of company resources.

Financial accounting has some internal uses as well, but it is much more concerned with informing those outside of a company. The final accounts or financial statements produced through financial accounting are designed to disclose the firm's business performance and financial health. If managerial accounting is created for a company's management, financial accounting is created for its investors, creditors, and industry regulators.

The information created through financial accounting is entirely historical; financial statements contain data for a defined period of time. Managerial accounting looks at past performance and creates business forecasts. Business decisions should be informed by this type of accounting.

Investors and creditors often use financial statements to create forecasts of their own. In this way, financial accounting is not entirely backward-looking. Nevertheless, no future forecasting is allowed in the statements.

The biggest practical difference between financial accounting and managerial accounting relates to their legal status. Reports generated through managerial accounting are only circulated internally. Each company is free to create its own system and rules on managerial reports. This means there is no centralized system regulating reports, and it can often take much longer to find what you need.

In contrast, financial accounting reports are highly regulated, especially the income statement, balance sheet, and cash flow statement. Since this information is released for public consumption and is highly anticipated by investors, companies must be very careful about how they make calculations, how figures are reported, and in what order those reports are constructed.

The Financial Accounting Standards Board (FASB), under the aegis of the Securities and Exchange Commission (SEC), establishes financial accounting rules in the United States. The sum of these rules is referred to as generally accepted accounting principles (GAAP).

Through this uniformity, investors and lenders compare companies directly on the basis of their financial statements. Moreover, financial statements are released on a regular schedule, establishing consistency of external information flows.

For a variety of reasons, financial accounting reports tend to be aggregated, concise, and generalized. Information is simultaneously more transparent and less revealing. This is not normally the case with managerial accounting as there are many reasons to do things a specific way for each company. For example, you might want to internally report lower bonuses so as to not anger mid-to-lower level employees who might want to peruse the report.

Managerial accounting reports are highly detailed, technical, specific, and often experimental. Firms are always looking for a competitive advantage, so they examine a multitude of information that could seem pedantic or confusing to outside parties.

The key difference between managerial accounting and financial accounting relates to the intended users of the information. Managerial accounting information is aimed at helping managers within the organization make well-informed business decisions, while financial accounting is aimed at providing financial information to parties outside the organization.

Financial accounting must conform to certain standards, in accordance with GAAP as a requisite for maintaining their publicly traded status. Most other companies in the U.S. conform to GAAP in order to meet debt covenants often required by financial institutions offering lines of credit. Because managerial accounting is not for external users, it can be modified to meet the needs of its intended users. This may vary considerably by company or even by department within a company.

If you enjoy working with financial figures, choosing a career in accounting or finance could be a great decision for you. But, you may be unsure about which degree to earn,  as the fields overlap. Therefore, it’s essential to pause your program hunt and ask yourself some crucial questions.

Finance vs. Accounting: The Basics

While there are many similarities between accounting and finance, they are two distinct disciplines. The main difference between them is that those who work in finance typically focus on planning and directing the financial transactions for an organization, while those who work in accounting focus on recording and reporting on those transactions. Put another way, accounting is the organization and management of financial information, whereas finance is the management of money.

What is Finance?

Finance is a broad term associated with managing money and acquiring needed funds, including budgeting, forecasting, lending, saving, investing, and borrowing. Financial concepts and principles, such as the time value of money and intrinsic value, are based on microeconomic and macroeconomic theory. According to Investopedia, the finance industry consists of three sub-categories:

• Personal finance involves financial planning for individuals. This can include long-term financial management plans, such as retirement, purchasing of financial products, such as mortgages, and banking.
• Corporate finance involves the financial activities for running an organization, which can include investment strategy and budgeting.
• Public (government) finance includes the tax, spending, budgeting and other policies that relate to how the government allocates resources.

Careers in Finance

Finance is a broad field involving the management of money that can encompass anything from corporate finance to personal financial planning. Careers in finance may include jobs such as:

Those who work in finance often deal with others outside the organization, such as government agencies, banks, investment firms and services, stockholders and suppliers.

Finance professionals often evaluate, control, or govern the monetary resources, investments, and assets of an organization with a focus on profitability. They may also be involved in the early stages of expansions and acquisitions and often play a key role in helping an organization respond to trends in the marketplace to either capitalize on upturns or help the organization withstand downturns.

Finance Required Skills

According to staffing agency Robert Half, soft skills are just as critical for finance professionals as technical knowledge. In a 2018 article on their blog, interpersonal skills, communication ability, and problem-solving skills are listed as essential skills for a career in finance, along with financial reporting, analytical expertise, and business acumen.

What is Accounting?

Accounting is the identifying, recording, and communicating of an organization’s economic results. A vital function for any business, accounting measures business activities, processes the information into reports, and communicates the results to decision-makers.

There are different areas of specialization in accounting, according to Investopedia:

• Financial accounting includes the generation of financial statements that typically involve a balance sheet, income statement, and cash flow statement. This information is used by external decision-makers, such as investors, creditors and taxing authorities.
• Managerial accounting often involves the same data as financial accounting, but it is used by internal stakeholders to make decisions on business operations. This can also include forecasting, budgeting, and other financial analysis tools.
• Cost accounting involves determining the cost associated with producing a product and helps businesses decide if they should produce the product and what the product should cost.

Careers in Accounting

Many people consider accounting to be a subset of finance, while others refer to it as the “language of business.” In the business world, those who work in accounting use a standard set of rules and principles, known as the Generally Accepted Accounting Principles (GAAP), to track and report on the financial transactions of a business and often manage the general ledger, cash flow, and tax obligations.

They typically work with journal entries, bank reconciliations, invoicing, and similar processes that relate to the daily operation of a business. They may also create quarterly and annual financial reports, analyze profitability, manage debt, audit internal transactions and report earnings.

Careers in accounting include:

Required Skills for Accounting

Similar to pursuing a career in finance, aspiring accounting professionals need to have a combination of accounting expertise, general business knowledge and soft skills to be successful. According to a 2016 Robert Half survey, over half of CFOs valued hard and soft skills equally when filling positions.

Robert Half states that hard skills in demand for accountants include expertise in technology and software systems, including Excel, ERP experience, SQL, Microsoft Visual Basic and business intelligence software. Soft skills include communication, leadership, and customer service.

Accounting vs. Finance Coursework

Although there is some overlap in coursework for accounting and finance degrees, the curriculum for a finance degree tends to be more mathematics-intensive and focused on financial markets, portfolio and investment management theory, financial management, investments, and security analysis and valuation. Courses for finance degrees are often more evaluative and analytical than accounting courses.

Accounting degrees include more coursework on quantitative analysis, internal auditing, income taxation, and accounting practices and methods. Accounting tends to be more process-oriented and many degree programs offer fewer electives than finance degrees since there are more required classes for accounting majors. A degree in accounting and a degree in finance prepare students for different career opportunities, and prospective students should explore both fields carefully before deciding upon either course of study.

Finance vs. Accounting: Salary Expectations and Job Outlook

Both finance and accounting fall under the Bureau of Labor Statistics (BLS) business and financial occupations category, which projects a faster than average demand for occupations from 2018 to 20281. The median salary in this category was $68,350 as of May 2018.

The BLS2 states that accountants and auditors will be in high demand from 2018 to 2028 and had a median annual salary of $70,500 in 2018. In comparison, financial analysts commanded a median annual salary of $85,660 in May 2018.3

Combine Your Accounting and Finance Career

A good thing to keep in mind is that despite their differences, accounting and finance are complementary fields and many students choose to major in one and minor in the other or opt for a double major. By fully understanding the differences and similarities between accounting and finance, you’ll be better able to select the educational path that best matches your skills, interests, and career goals.

Learn more about Florida Tech’s 100% online accounting and finance degrees!

1Bureau of Labor Statistics, U.S. Department of Labor, Occupational Outlook Handbook, Business and Financial Occupations, on the internet at https://www.bls.gov/ooh/business-and-financial/home.htm (visited November 26, 2019).

2Bureau of Labor Statistics, U.S. Department of Labor, Occupational Outlook Handbook, Accounting, and Auditor Occupations, on the internet at https://www.bls.gov/ooh/business-and-financial/accountants-and-auditors.htm (visited November 20, 2019).

3Bureau of Labor Statistics, U.S. Department of Labor, Occupational Outlook Handbook, Business, and Financial Occupations, on the internet at  https://www.bls.gov/ooh/business-and-financial/financial-analysts.htm (visited November 20, 2019).

National long-term projections may not reflect local and/or short-term economic or job conditions and do not guarantee actual job growth. Degree and/or certificate program options do not guarantee career or salary outcomes. Students should conduct independent research for specific employment information.