Types of Accounting: Study with Video Lessons, Practice Problems & Examples

Financial accounting focuses on creating information for external users, such as investors, creditors, and the government, following Generally Accepted Accounting Principles (GAAP) in the U.S. and International Financial Reporting Standards (IFRS) globally. In contrast, managerial accounting generates information for internal users, like management, without strict regulations. Understanding these distinctions is crucial for effective decision-making and compliance in financial reporting.

Types of Accounting: Financial and Managerial

Alright, so there are two types of accounting that you're going to focus on in your first few accounting courses. Let's see what they are. So the first one here is Financial Accounting. Financial Accounting is going to be the focus of this course. We're going to spend all of our time dealing with Financial Accounting, okay? And this is where we're creating information to report to external users. Okay? External users are people outside of the company. Alright? So when we're thinking about accounting, we're making information about the company and now we're making this information for people outside the company. Why would people outside the company want information about our company? Well, there could be investors, right? Investors might want to invest in our company, and they want to know if they're going to make a wise decision investing in us, alright? Another one would be creditors. So creditors, that's people who lend money to the company. So creditors, that would be something like a bank, right? And you could see why they would want good information about the company. Is this a good investment that they're making, loaning money to the company or is it a huge risk that they're taking? Okay. And the last one here would be the government. The government would be another good example. So when the government wants to collect taxes, well, they're going to need to know how much money you made to know how much to tax you. Right? So they're going to require certain information about the company as well. Alright. So let us talk about the laws here in the US and internationally. So when we're going to report financial information to external users, in the US, we follow what's called the GAAP, generally accepted accounting principles. Generally accepted accounting principles, that's what we follow in the US and they're set by FASB, Financial Accounting Standards Board. Okay? So GAAP is set by FASB and that's what we'll write right here. So GAAP, this is what we call it and FASB is who makes those standards. Okay? And internationally, we have something similar. We have International Financial Reporting Standards here behind me, let me get out of the way. So we call the International Financial Reporting Standards, we call that IFRS. Okay? IFRS and that's set by the International Accounting Standards Board. IASB. Okay? So we don't really have one for that, we just say IASB, but you can see that. It's easy to remember which one's the international one because they have Is right there. Right? I for IFRS, I for International Accounting Standards Board, right? And then we have GAAP and FASB in the US. So there are some differences between GAAP and IFRS. Some textbooks go into a lot of detail about this and we're going to have videos about that and some don't even talk about it at all, but it's good to know that they exist, that there are two different sets of rules, one that's used here in the US and one that's generally followed around the world. Okay. So financial accounting, we have these standards, we have these laws to follow and now let's talk about managerial accounting. This is the other type of accounting right down here And if financial accounting creates information for external users, what do you think managerial accounting is going to do? Well, we're going to be creating information to report to internal users. Okay. So this is people inside the company. So why would people inside the company want financial information? Well, we could have managers, right? Management of the company might want information of maybe how much it costs us per unit that we produce, right? Or marketing, the marketing department might want financial information, that might help them with their marketing campaigns. Right? So when we talk about the laws and the standard-setting for managerial accounting, well there are none, right? We're not reporting this to anybody outside the company, we can do whatever we want. We want to gather whatever information we want to help us make better decisions inside the company, nobody can stop us, right? There's no law saying what financial information we can gather about our own company, okay? So remember, managerial accounting, we're not going to focus on that in this course. This course, we're focusing here on financial accounting, alright? So that being said, let's go ahead and move on to the next video.

Here’s what students ask on this topic:

What is the difference between financial accounting and managerial accounting?

Financial accounting focuses on creating information for external users, such as investors, creditors, and the government. It follows Generally Accepted Accounting Principles (GAAP) in the U.S. and International Financial Reporting Standards (IFRS) globally. Managerial accounting, on the other hand, generates information for internal users, like management, to aid in decision-making. Unlike financial accounting, managerial accounting does not follow strict regulations or standards, allowing companies to gather and use information as they see fit to improve internal processes and strategies.

What are Generally Accepted Accounting Principles (GAAP)?

Generally Accepted Accounting Principles (GAAP) are a set of accounting standards and guidelines used in the United States to ensure consistency, reliability, and comparability of financial statements. GAAP is established by the Financial Accounting Standards Board (FASB). These principles cover various aspects of financial reporting, including revenue recognition, balance sheet classification, and materiality. Adhering to GAAP helps companies provide accurate and transparent financial information to external users, such as investors, creditors, and regulatory agencies.

Who are the primary users of financial accounting information?

The primary users of financial accounting information are external users, including investors, creditors, and the government. Investors use this information to make informed decisions about buying, holding, or selling stock. Creditors, such as banks, use it to assess the creditworthiness of a company before lending money. The government requires financial information to ensure accurate tax reporting and compliance with regulations. These users rely on standardized financial statements to evaluate the financial health and performance of a company.

What is the role of the Financial Accounting Standards Board (FASB)?

The Financial Accounting Standards Board (FASB) is an independent organization responsible for establishing and improving Generally Accepted Accounting Principles (GAAP) in the United States. FASB's role includes developing accounting standards that ensure financial reporting is transparent, consistent, and useful for investors, creditors, and other external users. By setting these standards, FASB aims to enhance the quality of financial information, thereby promoting trust and efficiency in the financial markets.

What are International Financial Reporting Standards (IFRS)?

International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB) for global use. IFRS aims to bring consistency, transparency, and comparability to financial statements across different countries. These standards are widely adopted outside the United States and are designed to provide a common accounting language, making it easier for investors and other stakeholders to compare financial information across international boundaries.