Accounting is one of the oldest-known professions in this world. Modern accounting is a very complex and evolving field, but in terms of practice, it can be roughly divided into the fields of financial accounting and managerial (or business) accounting.
Generally, foundations date modern accounting as beginning with the development of the double-entry accounting system. When you use a double-entry accounting system all entries are verified as both credits and debits, and therefore the fact that credits and debits should be identical serves as a simple method of dualistic-checking the accuracy of your entries. Accounting came into its own as a profession with the noble charters granted to the Organization of Accountants in the 1850s and has grown into a professional field employing hundreds of thousands today.
Financial accounting is generally required by principle or law and is a classified set of accounting standards that all accountants must apply to the financial records of the organization. In the U.S., auditors must adhere to the rules of generally accepted accounting principles (GAAP), whereas most of the rest of the world uses the International Financial Reporting Standards (IFRS) for financial accounting. The use of recognized accounting standards is required so that regulators, tax authorities and investors can have a consistent basis for comparison in evaluating company financial records.
Business or organizational accounting is focused on the needs of the business rather than meeting external accounting standards. Business accounting normally involves a large number of predictions and modeling activities and is often used to assist management in decision-making and performance evaluation. Business accounting is not compulsory, and many smaller businesses do not use much business accounting. However, almost all larger companies combine various forms of business accounting into the decision-making cycle of their enterprise model.
One key disparity between financial accounting and business accounting is that financial accounting is centered on meeting external financial standards, whereas business accounting is dedicated to meeting internal business needs. Related to this is the fact that financial accounting focuses on the finances of the overall organization, whereas business accounting typically focuses on one or two specific sectors of business. One More key difference is that financial accounting exclusively uses historic data and business accounting normally focuses on helping to make choices about the future. The uses for the two different types of accounting also lead to the contrast that the data and results related to financial accounting must be exact and verifiable, whereas in most cases business accounting involves making approximations and trends that can be produced in a timely fashion for decision making.
We hope this article would help you better understand the difference between business and financial accounting. You can also practically learn more about these terms by viewing the actual financial reports of the companies. You can perform a free company credit check and analyze different financial aspects.
If you know any other difference between business and financial accounting then do let us know in the comments section below.