18.2 Distinguish between Financial and Managerial Accounting

Key Differences

While both financial and managerial accounting use the same underlying financial data, they serve different purposes and have distinct characteristics.

Comparison Table

Characteristic	Financial Accounting	Managerial Accounting
Primary Users	External (investors, creditors, regulators)	Internal (managers, employees)
Purpose	Report on past performance	Support future decisions
Focus	Entire organization	Products, departments, activities
Time Orientation	Historical (past)	Future-oriented (budgets, forecasts)
Regulation	Regulated (PCN, IFRS)	Not regulated
Reporting Frequency	Periodic (monthly, quarterly, annual)	As needed (daily, weekly, monthly)
Level of Detail	Summary (high-level)	Detailed (specific)
Verification	Audited by external auditors	Not audited
Format	Standardized (required format)	Flexible (tailored to needs)
Scope	Financial information only	Financial and non-financial

Detailed Comparison

Users

Financial Accounting:

• Investors
• Creditors (banks, suppliers)
• Tax authorities
• Regulatory bodies (RCS, CNC)
• General public (for public companies)

Managerial Accounting:

• Business owners
• Managers
• Department heads
• Employees
• Internal decision-makers

Purpose

Financial Accounting:

• Report financial position and performance
• Comply with legal requirements
• Provide information for external decisions
• Build trust and transparency

Managerial Accounting:

• Support internal decision-making
• Plan and control operations
• Evaluate performance
• Improve efficiency and profitability

Time Orientation

Financial Accounting:

• Historical: Reports what happened in the past
• Focuses on completed transactions
• Provides historical financial statements

Managerial Accounting:

• Future-Oriented: Emphasizes planning and forecasting
• Includes budgets and projections
• Supports forward-looking decisions

Regulation

Financial Accounting:

• Regulated: Must follow PCN (Luxembourg) or IFRS (international)
• Standards set by regulatory bodies
• Must comply with legal requirements
• Subject to audit

Managerial Accounting:

• Not Regulated: No external standards required
• Flexible and tailored to needs
• No audit requirements
• Designed for internal use

Reporting Frequency

Financial Accounting:

• Periodic: Monthly, quarterly, annually
• Fixed reporting schedule
• Required by law/regulation

Managerial Accounting:

• As Needed: Daily, weekly, monthly, or on-demand
• Flexible timing
• Based on management needs

Level of Detail

Financial Accounting:

• Summary: High-level, aggregated information
• Entire organization view
• Standard financial statements

Managerial Accounting:

• Detailed: Specific products, departments, activities
• Granular information
• Customized reports

Example: Restaurant Scenario

Financial Accounting Report:

Income Statement - Le Petit Bistro
Year Ended December 31, 2024

Revenue                    €400,000
Cost of Goods Sold         (240,000)
Gross Profit                160,000
Operating Expenses         (120,000)
Net Income                 € 40,000

Managerial Accounting Report:

Product Profitability Analysis - Le Petit Bistro
Month: November 2024

Product          Revenue    Cost    Profit    Margin
────────────────────────────────────────────────────
Signature Dish   €12,000   €6,000  €6,000    50%
Lunch Special    8,000     5,000   3,000     38%
Desserts         5,000     2,000   3,000     60%
Beverages        10,000    3,000   7,000     70%
────────────────────────────────────────────────────
Total            €35,000  €16,000 €19,000    54%

The financial accounting report shows overall performance. The managerial accounting report shows which products are most profitable, helping Marie make decisions about menu pricing and promotion.

How They Work Together

Financial and managerial accounting complement each other:

Financial Accounting:

• Provides the foundation (historical data)
• Ensures accuracy and compliance
• Builds external credibility

Managerial Accounting:

• Uses financial accounting data
• Adds detail and analysis
• Supports internal decisions

Example: Financial accounting shows total food costs of €240,000. Managerial accounting breaks this down by:

• Product (which dishes cost most)
• Time period (seasonal variations)
• Supplier (cost by vendor)
• Location (if multiple locations)

This detailed information helps managers make better decisions.

Luxembourg Compliance Note

In Luxembourg:

• Financial accounting is mandatory (PCN, RCS filing, VAT returns)
• Managerial accounting is optional but highly recommended
• Managerial accounting supports financial accounting (better cost tracking)
• Both use the same underlying data (PCN accounts)
• Good managerial accounting improves financial reporting quality

Think It Through

Why might a business need both financial and managerial accounting? Can you think of a situation where financial accounting information alone would not be sufficient for making a business decision?

---