Difference between Business Accounting and Financial Accounting

Business Accounting vs Financial Accounting

Accounting has been here for a very long time, starting from the time of Sumerians. From large to small companies, businesses, and other markets, accounting runs them all. Accounting is a huge and evolving field and in terms of practice, it is divided into two parts, namely business (managerial) and financial accounting. In this article, we will discuss the basics of business accounting and financial accounting and their main differences.

What is Business Accounting?

Also known as managerial/management accounting, business accounting is more focused on the needs of the business rather than meeting the external accounting standards. It involves the number of projections, modeling activities and often used to help the business in making decisions and performance evaluation. Smaller businesses don’t use this type of accounting that much; it is also not mandatory. Large businesses and companies, however, incorporate business accounting into their decision making to produce effective business strategies.

What is Financial Accounting?

Financial accounting, on the other hand, is required by regulation or law and has a set of accounting standards which must be followed by all accountants and applied to the financial records of the organization. In the United States, accountants follow the rules of GAAP or generally accepted accounting principles. The rest of the world usually follows the IFRS or International Financial Reporting Standards for their financial accounting. These accounting standards exist so that all regulators, tax authorities and investors will have a consistent guide for comparison in reviewing the business’s financial records and other data. Most of the companies nowadays prepare to do an audit of financial statements under US GAAP.

There are two types of financial accounting, namely cash accounting and accrual accounting. Cash accounting focuses only on corporate transactions that involve cash. A corporate bookkeeper always debits or credits the cash account in each journal entry, and it depends on the transaction. Accrual accounting, on the other hand, records all transactional data, regardless of monetary inflows or outflows. Compared to the cash accounting method, it goes beyond it to take into account all transactions making up a business’s operating activities.

Main Difference between Business Accounting and Financial Accounting

1- Financial accounting is focused on adhering to financial standards such as IFRS while business accounting is focused on the internal needs of the business.

2- Financial accounting focuses on the finances of the company, while business accounting usually focuses on one or two specific segments in a business.

3- Financial accounting exclusively uses past or historical data while business accounting focuses more on helping the business decisions for the future.

4- The data and results related to financial accounting must be accurate and verifiable, while in business accounting, it involves in estimating data and results and also make trends that can be produced for the company’s decision making.

“Knowing the difference between business accounting and financial accounting is important- it helps you identify the needs of your business. If your business needs compliance in following financial standards such as IFRS, then you must invest more time and money in financial accounting. If your business needs to make more effective strategies for the growth of your business, then it’s time to focus more on business accounting. Of course, investing for both is a lot better- you are guaranteed to be successful in your business.”