Situation accounting and management accounting

Situation accounting and management accounting are two tools that provide managers with information on the accounting situation. They are distinct, but complementary. The former feeds the balance sheet, while the latter feeds the income statement. Here we give you the essential information on each of these two accounting tools.

Situation accounting

Situation accounting represents all operations 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 originates in one balance sheet account and is directed to 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 has. The liability accounts inform us of theorigin of the company'sassets (resources).

Opening of asset and liability accounts

At the opening, the starting amount is transferred to the balance sheet account. The opening amount is the balance brought forward (SAN) or the opening balance (SI). Transactions or flows are subsequently debited or credited in sequence. At closing, the value of the account at the end of the period is determined, i.e. the balance for balance (BBS) or final balance (FB).

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

Recording of transactions in the situation accounts (journaling)

The recording of transactions in the balance sheet accounts consists of transcribing all flows or movements that have no impact on the company's result. These include

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

Closing of status accounts

At closing, 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 of reality. In fact, a negative SPB means that the account balance is positive.

Management accounting

Management accounting includes expense accounts and income accounts. Unlike the situation accounts, the management accounts have a real impact on the company's results. The expense accounts are intended 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 money or bring money into the business, even if there is a cash outflow. The following are a series of examples to illustrate our point.

• The purchase of a car results in an expenditure of money. This expenditure is offset by a car that the company receives in return. This means that the transaction is not an expense.
• Similarly, a loan from a bank results in a bank transfer: there is therefore a debt that is contacted and must be repaid. The company receives money, but is not 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 tangible or wealthy in return.
• On the other hand, the sale of goods or the billing of fees is a product for the company. The supply of goods or the provision of services generates money.

Opening of expense and income accounts

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

Recording transactions in management accounts (journaling)

The values of the expense and income accounts change according to the transactions carried out by the company. The basic operating principle of the management accounts is identical to that of the situation accounts. It is a matter of transcribing the transactions in the debit column and in the credit column.

Unlike situation accounting, which only affects the asset and liability accounts, management accounting determines the company's result by means of a profit or loss. As a rule, management accounting automatically affects assets and liabilities. Below are some illustrative practical cases:

• the purchase of goods on credit and the sale of products on credit;
• accounting for employees' salaries and trust company fees;
• depreciation of fixed assets, etc.

Closing the balance sheet

At closing, the final balance to be shown on the income statement is determined. According to the principle of balance sheet equilibrium, the total of the debit side (left-hand column) must be equal to that of the credit side (right-hand column).

Types of transactions that do not affect the result

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

Types of transactions affecting the result

The balance sheet and management accounts are modified by consumption and production transactions. It is necessary to make a classification. 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 that have the accounting consequences of increasing income accounts and increasing asset accounts. They also involve the increase of income accounts and the decrease of liability accounts.

Determination of the result

The methodology for determining the result is not the same for the two types of accounting.

With management accounts

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

With the situation accounts

The initial balance sheet changes due to the activity of the company during the year. This change leads to a difference between the total assets and the total liabilities. The difference can be a profit in the case of an excess of income (output values) over expenses (consumption values). The difference can also be a loss in the case of an excess of expenses over income.

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

The double accounting system

Double accounting is an accounting system that consists of entering accounting transactions twice. This implies that each entry in one account must have a "symmetrical" counterpart in another account. Thus, any amount debited to one account will be credited a second time to another account.

The objective of double accounting is to ensure that the two types of accounting function simultaneously to form a single whole. We have: assets - liabilities = income - expenses. The two types of accounting make it possible to evaluate and measure the company's assets.

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