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Accounting is an extensive discipline that goes far beyond traditional accounting. Like any science, it branches to business information can be analyzed from various perspectives, from the financial statements up production capacity.
This is how financial accounting and administrative or managerial accounting are born, two sisters who share similarities and, at the same time, many differences.
What is financial accounting
It could be said that financial accounting is identified with the classic concept of accounting because it is responsible for:
- Record the operations in the accounting books
- Collect financial and budgetary data and then classify them
- Analyze financial information and verify that it complies with the legal parameters
- Inform about the commercial life of an organization
In short, it keeps an accurate record of the economic history of a company.
Financial accounting is also known as general accounting or external accounting, but it is only one side of the coin since the information prepared by general accountants is intended to illustrate external persons -possible investors, the State, banks, etc. – about the economic health of the company.
What is administrative accounting?
The management of accounting or management is the other side of the coin. While financial accounting collects accounting data, analyzes and presents it to the outside world, management accounting exposes its reports to the members of the company, that is, to managers, shareholders and senior managers.
Seeing it from this point, the administrative accounting is defined as the discipline that is at the service of the management, direction and administration of a company and, through it, seeks to know the financial health of the organization to facilitate the planning and making of decisions.
Objectives of financial accounting and administrative accounting
What distinguishes financial accounting from managerial accounting is what each of them pursues:
- Administrative accounting is a tool designed to produce truthful information for internal use that will be taken into consideration to improve sales, increase production capacity or evaluate policies. On the other hand, administrative accounting is an obligation imposed by commercial law through the Commercial Code and other fiscal regulations, such as the VAT Law.
- The administrative accounting presents its analysis in the simplest and most comfortable way possible so that everyone in the assemblies and meetings can understand the information. On the other hand, external accounting requires the use of certain formats and particularities, such as keeping the journal, accounts, profit and loss balance sheets, etc.
- Financial accounting is focused on evaluating the past, that is, the operations – income and expenses – that a company had in a certain period of time. In contrast, administrative accounting has its sights in the future. Ultimately, its main objective is to analyze the current numbers of the organization to improve strategies and results over time
But, if financial accounting and administrative or managerial accounting are so different, how do they resemble each other?
Similarities between financial accounting and administrative accounting
- Administrative accounting uses the same data sources as external accounting for analyzes
- In both disciplines, those responsible for the allocated funds are required to be held accountable for their work
- The two approaches use methods and mechanisms to verify whether or not accountability is accurate
- Both financial accounting and administrative accounting are complemented with cost accounting to improve the work of the company and increase its chances of success.
- Although administrative accounting is not a regulated practice in the organic, ordinary and special laws of Mexico, it could be within the statutes and the operations manual of an organization. In this case, both accounts would be obligatory, at least internally.