The Difference Between Corporate Accounting and Financial Accounting
The Difference Between Corporate Accounting and Financial Accounting
When it comes to business, maintaining proper accounts is vital, but there are differences between corporate accounting and financial accounting. This will give you an overview of the two accounting types and how each can benefit an organisation.
What Is Financial Accounting?
In any company, you will find a financial accounting system that deals with preparing financial statements and retaining records of financial data. Financial accounting in a business uses charts of accounts with policies and procedures that determine how transactions are placed in these accounts. Financial accounting discloses the financial health of a business, ensuring compliance with regulatory bodies. It is more focused on informing those outside the company of the business finances.
What Is Corporate Accounting?
Also known as management or managerial accounting, corporate accounting is the system used by a business to regulate revenues and expenses while also forecasting operations based on an organisation's financial status. This is a more internally-focused form of accounting used by companies. It allows business managers to collect information that encourages strategic planning, better resource use, and realistic goals.
What Are the Differences Between Corporate and Financial Accounting?
Both forms of accounting are hugely beneficial to business, but they differ in several ways, and your company must differentiate between the two.
- Directional Focus
In financial accounting, you’re looking at what a business has already achieved in terms of finances, as can be seen in the financial statements. However, with corporate accounting – rather than looking back over the business – you’re looking ahead by creating strategic plans, creating budgets, and estimating projected incomes and expenses.
- Projections or Facts
Financial statements from financial accounting are accurate, based on actual business done. This has to be the case as they are used by third parties to analyse a business's finances and can't be seen as 'cooking the books!' These accurate numbers are then used as a starting point for corporate accountants to create budgets and estimates for future business operations. The types of financial statements prepared include:
The income statement - or statement of financial performance - lets businesses assess and measure an entity's financial performance from period to period of the similar entity, competitors, or the entity itself.
Also known as a financial position statement, this shows the balance of a company's assets, liabilities and equities at the end of a period of time.
Statement of change inequity
A statement of change inequity is a financial statement that shows the shareholder contribution, the movement in equity, and equity balance at the end of the accounting period.
Statement of cash flow
The statement of cash flow is a financial statement that shows the movement of the entity’s cash during the period. This statement helps analysts understand the cash movement in the business.
- Reporting Types
There is a specific time frame for reports related to financial accounting, and these will be distributed outside the company to financial institutions, regulators, and investors. However, corporate accounting reports, which are used internally, focus on daily operations and are written up frequently. The types of corporate accounting reports you'll come across are:
Accounts Receivable Aging Reports
This breaks down the remaining balances of your clients into time periods so you can identify any debt collection issues.
Corporate accountants can create performance reports on everything from the entire company to individual departments and each employee for future decision-making.
Cost Corporate Accounting Reports
This determines the cost of articles manufactured, including raw materials, overhead, and labour. This gives you an accurate cost-per-item compared with the selling price.
- Legal Stipulations
When corporate accountants are putting together reports and budgets, they can do so without strict legislation because there are no legal issues related to internal accounting operations. However, when it comes to financial accounting, those involved need to follow all the country's legal requirements or face severe penalties. The reports prepared by financial accountants are needed for external auditing processes.
- Systems Used
Within financial accounting, there is no need to consider the company's specific system for making a profit; it's just the outcome that is concerned. However, with corporate accounting, the system is the focus as anything that gets in the way of generating a profit needs to be analysed and rectified.
- Asset Valuation
Financial accounting will consider the value of a company's assets and liabilities as these are needed for the accounting process. Whereas in the case of corporate accounting, the value of these items is not required for functionality, it's all about how productive they are.
- Transactions Performed
Corporate accounting does not rely on transactions in monetary terms; however, when it comes to financial accounting, this is a primary focus.
People looking to pursue a career in financial accounting will need a certified public accounting designation to ensure they’re fully trained in all legal requirements. However, those focusing on corporate accounting will only need a certified management accounting designation. The training differences will also mean that a financial accountant is typically paid more than a corporate accountant.
For financial accounting, you can use sophisticated software that keeps accurate records of your financial activity, with the ability to produce reports and meet legal requirements. Corporate accounting will likely need other software accounting features, including budgeting or planning.
Why Is Financial Accounting Important to Business?
The bottom line for all businesses is, effectively, financial accounting. It outlines how a company is doing in terms of productivity, which can be used to analyse a business's overall health. Here are some ways it impacts decision-making.
1. It Guides Investors
Before investing in any organisation, individuals and businesses will want to look at the company's financial statements, including the balance sheet, cash flow, and income statements. These allow both analysts and investors to evaluate how creditworthy a company is.
2. Internal Guidance
Through accurate and honest financial accounting, a business can meet all external legal requirements and optimise day-to-day operations. As mentioned, corporate accountants will rely on accurate and up-to-date financial data to project budgets and outline better business strategies.
3. It Aids Investors
When a lender determines whether or not to lend money to a company, they first perform a risk analysis that will review the financial accounting. This will give lenders an idea of all the business assets and debt, giving a clear indication of the company’s creditworthiness.
Why Is Corporate Accounting Important to Business?
Many businesses haven’t yet adopted corporate accounting as it isn’t a legal requirement, but this is a major oversight. Corporate accounting is hugely beneficial to business in a number of ways. Here’s how.
1. Analysing Your Audience
Corporate accountants can make for much more impactful marketing campaigns as they provide useful insight into the customer profile in terms of income level, academic background, lifestyle, and values. This can then be used to hone in on audience targeting with companies better prepared to allocate time and resources accurately.
2. Cost Analysis
A primary function of the corporate accountant is the creation of a budget to guide future spending. They will perform a thorough cost analysis of your company, explore avenues for future opportunities, and make a more profitable business model.
3. Determine a Budget
Using the statements from financial accounting, your corporate accountants can create more accurate budgets linked to your sales' history and market information. The past business activities will then be able to define future business opportunities.
Accounting software for financial and corporate accounting will allow you to enjoy the benefits of financial compliance and business forecasting related to these two operations. Check with Omni Accounts about their industry-specific software that will meet your business needs.
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