Learn differences between simplified and full financial accounting and managerial accounting and choose wisely

The article by PKF expert (Jagoda Antoniak - Associate Partner for Outsourcing).

Do you run your own business? Do you achieve very good results and still have new ideas for development? That is excellent!

In this article I would like to convince you why it is not worth delaying implementation of full financial accounting and managerial accounting as well as controlling in an organization.

In recent years, we have observed dynamic development of the sector of small and medium-sized enterprises in Poland. As data collected by the Central Statistical Office (GUS) show, in 2022 about 2.3 mln non-financial enterprises, i.e. about 15% more than five years earlier and nearly 36% more than a decade earlier, operated in Poland. As much as 97.1% of this sector constituted micro entities, i.e. entities which employ up to 10 employees and whose annual turnover and/or balance sheet total does not exceed EUR 2 mln. A notable part of this group includes enterprises with Polish capital.

Simplified accounting, tax books

Depending on the legal form of running business activity, as well as on the size of the business, various forms of register of economic operations are available for entrepreneurs. The simplest forms of register include tax books which mostly perform fiscal functions, and their main task is to provide information for correct settlement of amounts due towards public institutions. Tax books will work in small businesses with predictable and repetitive operations and in the industry of relatively small risk.

Full accounting

Another option includes books of accounts, i.e. register of economic operations based on
the Accounting Act. Books of accounts, apart from information necessary for fulfilment of
tax obligations, present a wider range of financial data enabling more precise assessment of the financial situation of an enterprise, its results and cash flows.

In accordance with Polish regulations, the obligation to apply the Accounting Act applies to all legal persons, whereas natural persons running their business activity may choose between tax register (tax books) and full accounting, provided that they do not exceed the limit of annual revenues amounting to EUR 2 mln.

Also, the Accounting Act provides for a number of simplifications for micro- and small entities which include i.a. simplified reporting (without the obligation to prepare notes, cash flow statement, statement of changes in equity) or simplified register of economic operations, e.g. with regard to lease, deferred tax or accruals.

For young growing companies aspects related to economic register and accounting rarely may be found on the list of priorities. A more comprehensive register may involve higher costs of accounting service, thus many business owners do not decide to incur such an expenditure.
The measure of success and development of an organization remains available data only: revenues and their increase, achieved result or balance of funds accumulated on bank accounts.

Often businesses obliged to apply the Accounting Act decide to take advantage of simplifications provided for in this Act. Frequently, this is not a conscious decision of the owner, but an accepted practice of an entity providing accounting services. Such an attitude may be sufficient, but only till the moment when the business stands on the threshold of another stage of development in which it will need e.g. additional financing, investor or strategic partner, or it will need extensive financial data to make a strategic decision.

Usually, a potential investor, partner or bank expects from the business owner financial data consistent with reporting standards commonly used among large entities in the market, e.g. full accounting in accordance with the Accounting Act or even the International Financial Reporting Standards. Then books kept in a simplified way prove to be illegible or insufficient for assessment of the financial situation of an enterprise, preparation of a development forecast, valuation or comparison with industry trends. Adjustments, e.g. with regard to appropriate presentation of financial leases, recognition and valuation of provisions or accruals or appropriate recognition and calculation of revenues in the case of long-term services, are required. Frequently, adjustments should be made also to comparative periods, which comes down to an analysis of data from minimum two years.

This involves very high costs and naturally delays the whole investment process.

Managerial accounting

It should be pointed out that apart from providing financial data in a specific format investors or business partners expect also comprehensive managerial information, including financial data at a low level of aggregation.

A margin analysis by groups of products, clients or projects or information on the structure of costs, revenues and portfolio of clients may prove to be necessary. These data make it possible to assess what a business earns and loses money on and where the so-called “bottlenecks” are located. This makes it possible to make a decision and take corrective or remedial actions as well as to set strategic directions for development.

Such a type of data is available thanks to the implementation of managerial accounting.

Summary

In order to emphasize how crucial role managerial accounting fulfills Bill Gate’s words should be cited.  „Business of each company starts from and ends on an in-depth analysis of numbers. No matter what a given company deals with, if the company is not able to draw conclusions from facts concerning its activity and makes decisions based on superficial information or intuition, it will ultimately pay a heavy price.”

Benefits from implementation of full and managerial accounting may be an added value not only for third parties interested in the business, but also directly for the owner. Regardless of the development scenarios being considered, you should know strengths and weaknesses of your organization in order to be able to efficiently manage it in an uncertain and rapidly changing economic environment and timely make appropriate decisions.

Additionally, an owner who is conscious and knows his/her organization well always will have a better negotiation position in any interactions with business partners.

In today’s world, “time” is one of the most valuable elements in building a competitive advantage. A well prepared system of financial and managerial accounting by application of IT tools often enables obtaining necessary data in real time, on a regular basis.

Therefore, each, even a small but forward-thinking, organization should pay attention to the form in which its books of accounts are kept and consider whether to make a change and move up a level, moving towards full accounting under the Accounting Act, simultaneously starting implementation of managerial accounting and controlling.