Answer to Question #185317 in Economics for Alex Baraka

Question

Two accounting concepts or conventions could clash or there could be inconsistency between them.

Give two examples of such situations and explain how the inconsistency should be resolved.                                                                                                  

Answer 1

In theory, accounting and management accounting have a lot in common, but in practice, their conduct in a particular company can be very different. As a result, preparation of consolidated reports regularly takes a lot of employees' time, and the results of this work are not even used. Either the report appears when management decisions have already been made, or the management no longer believes in the data, in which they found errors many times. To solve the problem, a unified methodology for maintaining all records is needed.

Many companies start with only mandatory regulated accounting. The need for internal management appears at a stage when the first becomes insufficient for management. For example, data from accounting may show an already irrelevant state of affairs, and this is not suitable for operational actions. Or there is a need to plan, but according to information from regulated accounting, this is difficult to do.

Then management accounting is added, with the help of which it is possible both to view the planned costs and receipts, and to detail the results already achieved (for example, in order to correctly respond to the increased demand, taking into account the categories).

They are conducted in different ways and in different places.

But since it is not obligatory to maintain in our country, there are no rules for its administration. Therefore, each company begins to conduct it in its own way and most often manually: before, everyone started in Excel, now some use Google Sheets or keep records in the system on a separate chart of accounts without any connection with accounting. With BU, they turn out to be technically not synchronized or not fully synchronized, and also analytical data may diverge in different accounting dimensions.

As the organization develops, the parameters by which the management measures the performance may change, and with them the rules for drawing up management reporting change or supplement. Accounting also becomes more complicated over time: more elements appear to be reported, new legal entities are opened, new accounts are used, new items are created.

As a result, a complex system is formed evolutionarily, where the internal accounting is very far from the regulated one and the processes of preparing each type of reporting and their comparison are cumbersome and not optimal.

How accounting conflict affects business

Delays in reporting: in a complex system consisting of very different and autonomous parts, reporting takes a long time - this does not allow to quickly respond to the market situation, and the business is missing out on opportunities and profits.

Inaccurate reports: errors are often made in the results, because of them the management makes the wrong decisions, and the company again loses in money.

Inconsistency of reports: information from different accounts contradicts each other, and this can already interfere not only with internal management, but also with obtaining investments and loans.

The high cost of accounting: it takes a lot of employees' time to enter data, generate reports, reconcile and adjust - accounting is expensive.

As a result, the company loses money in various ways, and the management manages it almost blindly, because the reports are either not there when they are needed, or they already have little faith in their reliability.