Situation accounting and management accounting

Situation accounting and management accounting

Situation accounting and management accounting are two tools that provide managers with information about the accounting situation. They are distinct, but complementary. The former feeds into the balance sheet, while the latter feeds into the profit and loss account. Here we take a look at what you need to know about each of these two accounting tools.

Situation accounting

Situation accounting represents all transactions that have no influence on the result. In other words, these transactions do not change the company's profit or loss and therefore have no impact on the result. The balance sheet is balanced because each flow has its origin in one balance sheet account and its destination in another balance sheet account.

The balance sheet accounts affect only the balance sheet accounts (the asset accounts and the liability accounts). The asset accounts show the composition of the assets (uses), the use being the use of what the company owns. The liabilities accounts tell uswhere the company'sassets and liabilities (resources)come from .

Opening asset and liability accounts

On opening, the starting amount is transferred to the balance sheet account. The opening amount is made up of the balance brought forward (SAN) or the opening balance (SI). Subsequent transactions or flows are debited or credited. At the balance sheet date, the value of the account at the end of the period is determined, i.e. the balance for balance (SPB) or final balance (SF).

The balance brought forward is positive + if the value determined is positive. Conversely, it is carried on the negative side - if the said value is negative.

Recording transactions in balance sheet accounts (journal entry)

Recording transactions in the balance sheet accounts involves transcribing all flows or movements that have no impact on the company's profit or loss. These include

  • cash paid into the bank account ;
  • payment into the bank account for a capital increase;
  • payment to suppliers or repayment of a debt;
  • purchasing a vehicle or equipment on credit, etc.

Closing the balance sheet

At the balance sheet date, the debit total (left-hand column) must equal the credit total (right-hand column). The balance of the balance sheet (total debit = total credit) is maintained by the trial balance. This justifies the fact that the SPB is always on the opposite side to reality. In fact, a negative SPB means that the account balance is positive.

Management accounting

Management accounting is made up of expense and income accounts. Unlike situation accounts, management accounts have a real impact on a company's results. Expense accounts are used to record transactions that make the company poorer. Income accounts are used to record flows that enrich the company.

According to accounting principles, some transactions do not cost the company any money or bring it any money, even if there is a cash outflow. Here are a few examples to illustrate what we mean.

  • Buying a car means spending money. This expense is offset by a car that the company receives in return. This means that the transaction is not an expense.
  • Similarly, a loan taken out with a bank results in a bank transfer: a debt is therefore incurred and must be repaid. The company receives money, but is no richer. The transaction is therefore not a product.
  • In contrast, a telephone bill is an expense for the company. In effect, the company pays for its consumption, but receives nothing in the way of tangible assets or wealth in return.
  • On the other hand, the sale of goods or the invoicing of fees is a product for the company. The supply of goods or the provision of services generates money.

Opening income and expense accounts

Unlike situation accounts, management accounts have a balance equal to zero (or start from zero) at the beginning of a new accounting period. Expense and income accounts record expenses and income for a given period. The aim is to list the items of expense and income during the period.

Recording transactions in management accounts (logging)

The values in the expense and income accounts change according to the transactions carried out by the company. The basic operating principle of management accounts is identical to that of balance sheet accounts. Transactions are entered in the debit and credit columns.

Unlike situation accounting, which only deals with assets and liabilities, management accounting determines the company's profit or loss. As a general rule, management accounting automatically affects assets and liabilities. Here are a few practical examples:

  • buying goods on credit and selling products on credit ;
  • accounting for staff salaries and fiduciary fees;
  • depreciation of fixed assets, etc.

Closing the balance sheet

At the balance sheet date, the final balance to be shown on the profit and loss account is determined. According to the principle of balance in the balance sheet, the total debit (left-hand column) must equal the total credit (right-hand column).

Types of transactions that do not affect profit or loss

A transaction that does not affect profit or loss is a flow that modifies asset accounts (uses) or liability accounts (resources). As each transaction has its source in one balance sheet account and its destination in another, the balance sheet is balanced. Consequently, these flows have no effect on the results.

Types of transactions affecting profit or loss

The income statement and management accounts are modified by consumption and production transactions. A classification is necessary. Consumption transactions are those that result in an increase in expense accounts and a decrease in asset accounts, and those that result in an increase in expense accounts and an increase in liability accounts.

Production transactions are those whose accounting consequences are an increase in income accounts and an increase in asset accounts. They also involve increases in income accounts and decreases in liability accounts.

Determining profit or loss

The method for determining profit or loss is not the same for the two types of accounting.

With management accounts

To determine the profit or loss at the end of the financial year, the final balance (net expenditure and net income) of the management accounts is transferred to the profit or loss account at the end of the period. We can then derive the management formula: Income - Expenses = Profit or loss. The result may be a profit or a loss.

With the situation accounts

The initial balance sheet changes as a result of the company's activity during the year. This results in a difference between total assets and total liabilities. The difference may be a profit in the case of a surplus of income (production values) over expenses (consumption values). The difference may also be a loss if expenses exceed income.

The final balance sheet before appropriation of profit is used to calculate the company's profit by comparing assets and liabilities. The calculation formula is: Assets - Liabilities = Profit (+ Profit, - Loss). There are two methods of calculating profit in accounting. The first is to use the situation accounts and the second is to use the management accounts.

The double-entry accounting system

Double-entry bookkeeping is an accounting system that involves entering accounting transactions twice. This means that each entry in one account must have a "symmetrical" counterpart in another account. This means that any amount debited from one account will be credited to another account a second time.

The aim of double-entry bookkeeping is to ensure that the two types of accounting operate simultaneously to form a single whole. Assets - Liabilities = Income - Expenses. The two types of accounting make it possible to evaluate and measure the company's assets.

That's all there is to it! You now know the basics about these two types of accounting.

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