Why is managerial accounting not governed by external standards like GAAP?

Question

The question "Why is managerial accounting not governed by external standards like GAAP?" seeks to understand:

1. Why managerial accounting is not required to follow strict external regulations like GAAP.
2. How its focus on internal decision-making allows flexibility in reporting.
3. The difference between managerial accounting (internal use) and financial accounting (external reporting).
4. Why customization and forward-looking information are important in managerial accounting, and why they don't align with the standardized nature of GAAP.

Answer 1

Managerial accounting differs from financial accounting due to its focus and purpose. Financial accounting provides standardized financial information, mainly for the use of external parties (investors, creditors, regulators, etc.). While managerial accounting is used by internal parties (managers, employees, etc.) to provide information needed for daily decision making. Managerial accounting is not governed by external regulations, such as GAAP, allowing organizations to meet their needs and circumstances.

As the emphasis in managerial accounting is to help organizations improve operational efficiency and decision making, it involves more detail than simple financial statements provide. There is flexibility in reporting which allows more customization in data presentation. Managerial accounting requires both financial and non-financial information for a more forward-looking view. Forecasts, budgets, and performance evaluations are often used to support planning, controlling, and prioritization. The adaptability enables organizations to respond to their unique challenges and opportunities, contrasting with the compliance-driven nature of financial accounting.