The differences that exist between management and public accounting are almost greater than their similarities. What are these differences and why are they important?
When individuals think of the word accountant, the acronym CPA comes to mind as well. However, management accountants, although less recognized and understood, contribute at least as much to the working of businesses today as public accountants. There are similarities and differences between these two closely related professions and they are both necessary in our current system of business. They also both follow codes of ethics that are increasingly important in the post-SOX (Sarbanes-Oxley) business world we live in today.
Public Accounting
Public accounting is involved in the preparation, auditing, and presentation of financial statements. The most common financial statements include the balance sheet, the income statement, and the statement of cash flows. The balance sheet lists an entity’s assets, liabilities, and owners equity accounts and is a snapshot of a certain date. As its name suggests, the balance sheet is essentially an equation that must balance. Assets = liabilities + owners equity. The income statement presents a time period and lists the entity’s revenues and expenses. The statement of cash flows shows how much of an entity’s cash was received and spent in operating, investing, and financing activities. This is perhaps the most important financial statement because it shows that an entity has (or does not have) enough cash to pay its creditors. It also shows where the cash is coming from and if this cash source is likely to be available in the future.
Essentially, public (or financial) accounting is concerned with (as its name suggests) the public. Financial accountants concern themselves with the objectivity, conservativeness, and transparency of information. The main users of financial accounting reports and information are external. Examples of external users include investors (current and potential), creditors, stockholders, and potential employees.
Managerial Accounting
Managerial accounting is also concerned with reports, but less with historical reports that are prepared by financial accountants. Managerial accountants are likely to be involved in preparing budgets, investment appraisals, costing reports, and modeling. To prepare many of the reports necessary for management to make effective daily decisions, managerial accountants must not only review historical data, but also conduct research and use databases to predict future costs and revenues. Management accountants should also have a good understanding of finance implications. Managerial accounting reports and information is used internally by management. In most companies, few (if any) of these reports are ever seen by external parties.
Aside from the traditional budgets and costing reports management accountants are known for, management and modeling have become increasingly important job functions for management accountants, as have business planning and financial analysis. Also, ethics have become increasingly important to management accountants as the awareness of ethics (and the lack thereof) in business today has become a hot topic. The Institute of Management Accountants (IMA) is the leading organization for management accountants. They offer the Certified Management Accountant (CMA) designation which is comparable to the Certified Public Accountant (CPA) designation for financial accountants.
In Brief
Although financial and managerial accounting are similar in many ways, their purposes and areas of concentration are, much of the time, very different. Financial accounting is primarily concerned with communicating historical, objective, transparent information to external users. Managerial accountants concern themselves with communicating future-oriented information and analyses to internal users. However, both of these professions focus on ensuring the information they communicate is accurate, relevant, and ethically applied.
Related Articles:
What is the IMA?: Overview of the Institute of Management Accountants
How to Become a CMA: Requirements to Get Certified as a Management Accountant
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