An entrepreneur, even if he does not want to, necessarily faces the issue of financial accounting. Any businessman, even those who are just starting their first company, knows that you need to keep accounting. Some people think that everything related to the company’s finances is accounted for and solved.
Those who are more experienced know that there is tax, accounting and management accounting. However, many do not fully understand how they differ and how they relate to each other.
It has been a long time since it became known that business pays taxes to the state. In order for business to pay as much as it was established to pay, the state obliged business to keep records of finances. This accounting is called tax accounting.
The purpose of tax accounting is to collect the necessary information about the movement of money in the company in order to correctly calculate taxes and transfer this information to the state in the prescribed form.
This accounting is strictly regulated by the tax authorities – how and in what form it should be maintained, how and when to submit reports. Its regulatory sources in Russia are the Tax Code, laws and regulations of the State Tax Service and other authorities.
A significant part of the questions on how to account for and what kind of reporting depends on the taxation system.
A legal entity has a choice of several systems for tax calculation:
А. General system of taxation (GSTS), under which the company will pay profit tax and VAT (and some other taxes).
Б. One of the special regimes that aim to reduce the tax burden and simplify reporting. This may be:
- Simplified taxation system. It exists in two forms. One tax is paid on the company’s income, the other on income reduced by the amount of expenses. The simplified taxation system is one of the most popular forms in small business.
- Single tax on imputed income – a system allowed for the application of certain types of activities, such as retail trade, household services, advertising, and links the calculation of tax to natural indicators, such as the area of commercial premises.
- Single agricultural tax – available for businesses in the agricultural sector.
- Individual entrepreneurs also have access to the patent system regime, where once paid, it is possible to engage in entrepreneurial activity for a certain period of time.
Accounting, as well as tax accounting, is oriented to the standards set by the state. Its purpose is not only to calculate the tax base, but also to evaluate the company according to unified standards.
Accounting in Russia has its own standard, the so-called RAS. Accounting is the responsibility of any legal entity. As a rule, it is the norms and terminology of RAS that an entrepreneur has to deal with when he tries to deal with accounting independently, or understand what an accountant says in his own language.
Accounting contains information on what resources, in what amount and in what place the company has or had at a certain point in time, what goods are in stock or in transit, how much money is in cash and on the current account, whether the company has debts in the form of loans and credits.
In other words, accounting terminology is the economic essence of the company’s processes. However, it has its own limitations:
(a) Accounting does not allow for the flexibility that is often required in order to correctly interpret certain facts from the point of view of business management;
(b) Accounting often lacks depth, which is also necessary for decision-making. Or, more dramatically, the answers that a business can get from an accounting slice alone can take an entrepreneur in the wrong direction;
(c) Accounting reports are of “historical nature”, i.e. they are collected at a certain point in time and show the state of the company for the past period (for example, for the previous quarter or year).
A typical mistake of many entrepreneurs in financial management is to hire an accountant for tax and accounting and try to get answers to all questions related to the company’s finances from him. In fact, the main task of an accountant is to ensure that taxes are calculated correctly.
The purpose of management accounting is to become a source of information for the management of the company.
To help business make decisions, management accounting operates as widely as possible with data on money and resources of the company:
- Management accounting looks at your business as a whole. For example, if the business has several directions, each of them may have its own sales funnel, its own variable costs, its own marginal profit, while from the point of view of accounting the revenue and expenses of all directions that the company has will be combined into a common pile.
- In addition to the data expressed in financial indicators, management accounting may contain data in kind, for example, how many customers buy a service per month, how many projects is the company, etc.
- Management accounting should not only assess the company on the basis of past periods, but also plan the financial activities of the company – that is, includes the creation of a budget for the future and control over the execution of this budget.
Why keep management records
Each type of accounting has its own goals: tax – to report to the state on taxes, accounting – to evaluate the company according to uniform standards for the state and external persons, management – to give answers for decision-making for management and owners. Each of these types of accounting evaluates the same facts of economic activity in its system of coordinates.
If you are a manager or owner of a company and you need financial information when making decisions, your source of information is management reporting. If you have previously limited yourself to only getting acquainted with the reports prepared by the accountant for the tax authorities, it is high time to take care of the management accounting.
Laying the groundwork for it will help you plan your company’s activities more easily, assess the achievement of plans, find out the reasons for certain results, and adjust the company’s processes.