Accounting and book-keeping are one of the key reasons for ensuring a successful start-up business and one of the crucial business functions to be managed and looked after. By definition, accounting could be defined as the process of recording, analyzing, summarizing, and reporting the financial transactions taking place in a start-up on daily basis to be later consolidated and studied for various purposes such as evaluating the performance of the business over a certain period and making key decisions for the business.
With the accounting data so collected and recorded is then used for the preparation of necessary financial statements such as-
- Income statements that provide information regarding the profits & losses;
- Balance Sheet that offers a clear picture of the financial position of the business on a particular date.
- Cash flow statement that provides information regarding the cash inflows & outflows during a specific period.
- Statement of retained earnings.
These financial statements so prepared with the use of accounting data are the detailed statements of the financial transactions over any particular accounting period. Thus, accounting not only helps in the preparation of the financial statements but also allows the consolidation of financial information to make it clear and understandable for all stakeholders to evaluate the performance of a start-up. Therefore, irrespective of the size of the start-up or scale of operations, it is crucial to keep your accounting data and financial records clear and transparent irrespective of the size of the business to keep it afloat. Here are just a few of the reasons why accounting holds paramount importance for your start-up business-
Importance of accounting for businesses
i. Recording Business Transactions
Accounting allows the start-ups to keep a systematic record of the financial information of the organization. Up-to-date records of the business help the users to compare present financial information with historical data. Financial information with accurate records allows the stakeholders to assess the performance of a company.
ii. Better Decision-making for Management
Not only accounting is beneficial for outsiders to assess the performance of the start-up business, but it is also important for its internal management. Such internal management needs accounting to make and implement decisions anywhere between pursuing geographical expansion to, instead, improving operational efficiency and reviewing business decisions periodically.
iii. Fulfill Legal Compliances
There are various legal & regulatory compliances associated with accounting and financial records. Proper accounting helps organizations to ensure accurate reporting of financial assets and liabilities against applicable authorities as they use financial statements to assess a company’s declared gross revenue and net income. The system of accounting assures that a company’s financial statements are legally and accurately submitted.
iv. Raising Capital/Loans from the investor
Business investors and/or financial institutions looking to provide loans or offer capital to the start-up prefer to get in-depth knowledge of the financials of the company, sales & turnover, profits, etc.
v. Helpful with Creation of Budgets
Every start-up needs to create and plan a budget to save money, create business strategies, control expenditures, and implement corrections (if required) for which various financial records are required. Accounting also helps businesses to maintain records of financial statements and develop a budget for their business.
What are the various types of accounting?
There are different types of accounting which are as follows:
i. Cost Accounting- Cost accounting is the type of accounting that records the costs of production (either fixed or variable) and the total production cost of a business. It is a method of accounting that helps to determine the costs involved in performing any project, process, or product recorded and analyzed. Analysis of the total cost of production helps business management to make key strategic decisions.
ii. Financial Accounting- Financial accounting is the accounting that mainly focuses on the process of recording, summarising, and reporting the financial transactions undertaken in the business operations for a particular period. Such transactions are then used to create and present the financial statements of the business such as preparing account starts, including the income statement, balance sheet, and cash flow statement.
iii. Managerial Accounting- Management accounting is a branch of accounting, that deals with managerial decision making with the help of consolidated information to make strategic plans and decisions for the business. The data so collected under managerial accounting includes information from all fields of accounting and all departments of the business. It helps take indispensable decisions within highly competitive businesses, particularly about cash flows, sales, budgets, and investments.
iv. Tax Accounting- Tax accounting is a branch of accounting that records transactions for tax purposes following various tax laws to be taken care of by assesses such as individuals and start-ups during the preparation of tax returns. This type of accounting aims to track the inflow & outflow of funds in relation to the start-up business.
v. Forensic Accounting- Forensic accounting is the accounting that uses accounting, auditing, and investigative knowledge and skills to examine and evaluate the finances belonging to a company or individual. This type of accounting is normally used for the detection of frauds and embezzlement and to collect pieces of evidence in monetary crimes for court proceedings.
Difference between Financial and Management Accounting-
Now that you have a basic understanding of all types of accounting, it is interesting to study the differences between financial and management accounting. Though the terms financial & management accounting may be used synonymously with each other, in reality, both the terms are poles apart. Though they may be related to each other, they are different in terms of their scope, purpose, and focus areas.
To quote a few, financial accounting primarily focuses on the plain disclosure of the financial facts to help the stakeholders and other outsiders make informed decisions about the start-up business. Whereas, Management accounting uses economic and financial principles along with financial accounting to help the internal management discuss the financial health of the start-up, make prompt and effective decisions and implement them to ensure efficiency and effectiveness in the organization. However, such information is strictly confidential and is just limited to the management of the company.
While financial accounting primarily emphasizes giving a true and a fair view of the financial position of the start-up, management accounting targets to offer both qualitative and quantitative information to the start-up managers allowing them to take corrective actions and thus maximizing their profits.
Therefore, provided below are some key differences between financial & management accounting –
| Points of Difference | Financial Accounting | Management Accounting |
| i. Meaning & Definition | Financial accounting is the process of recording, summarising, and reporting the financial transactions arising out of the routine business operations for a certain accounting period.
It includes the preparation of accurate financial statements for various business purposes. |
Managerial accounting is the branch of accounting that analyses the information gathered from financial accounting to prepare crucial reports & statements for business operations to achieve maximum efficiency by reviewing financial accounting and making decisions and finally making
further instructions to all internal business managers.
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| ii. Aims & Objectives | The main aim is focused on providing and disclosing information to shareholders & outsiders like creditors, investors, clients, and customers, etc. to represent a clear picture of the start-up business. | Generally, management accounting focuses on supplying information for the internal management of a start-up to study the financial health of the business and make informed business decisions. |
| iii. Regulatory Requirements | Every business must disclose the financial statements with a copy of financial statements in the annual return for every start-up in each financial year. Thus, they are administered by the accounting standards board, regulatory authorities, and the government. | Generally, the information related to management accounting is confidential and is disclosed at the discretion of the internal management. Though, there is no strict requirement but institutes like ICAI, ICMAI, etc, provide certain frameworks and formats for disclosure. |
| iv. Governing Principles | Financial accounting statements are prepared based on Generally Accepted Accounting Principles (GAAP). However, these accounting principles vary slightly country-wise with more or less the same features. | There are no standardized principles for the preparation of management accounting statements. Hence, they may be different for each start-up or business as per the requirements of the management team. |
| v. Reporting Beneficiaries | The beneficiaries of financial accounting include external parties like business clients, customers, investors, creditors, banks or financial institutions, etc. | The beneficiaries of the management accounting are/is the internal management such as the CEO, board of directors, promoters, higher-level managers, etc. |
| vi. Time Period | Financial accounting is based on past data, thus the time horizon for financial accounting is the previous accounting year. | Management Accounting has no specific time horizon but is focused on the estimation of the future using the past data. |
| vii. Independent Audits | It is compulsory under the provisions of the Companies Act 2013 to conduct an Independent audit of financial accounting reports of the start-up/other businesses by an independent CA in practice.
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There is no specific regulatory requirement to conduct an independent audit for management accounts as it includes project data for the future which could be inaccurate.
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| viii. Confidentiality | Financial statements prepared are publically disclosed to the public and external stakeholders. Thus, there is no concept of confidentiality in financial accounting. | The data relating to management accounting is meant for the study and guidance of the management of the start-up business. Therefore, it is bound to keep them confidential as they contain business secrets. |
| ix. Type of information recorded | It focuses only on monetary transactions. | It focuses on both monetary as well as non-monetary events like technical changes, competition, etc. |
| x. Input Information | The information required for the purposes of financial accounting statements is purely financial. | Management Accounting involves both financial as well as non-financial information for the preparation of its reports. |
| xi. Methodology | Under financial accounting transactions related to any accounts i.e. nominal accounts, real accounts, and personal accounts are recorded and analyzed. | Under management accounting, the data is collected and analyzed following the responsibility center or cost center. |
| xii. Outputs | Financial accounting reports consist of –
· Profit and loss statements, · Balance sheet · Cash flow statements and · Statement of Retained Earnings |
Management accounting reports comprise periodical (monthly, weekly, or yearly) analyses of products, geographies, functions, etc. |
| xiii. Relevance & Precision of Data | The reports generated through the use of financial accounting are 100% verifiable and precise with the evidence to support them.
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Since the management accounting reports also include future projections, the data is lesser likely to be 100% verifiable. |
| xiv. Segment Reporting | It is focused on the whole business rather than any one part or segment of the whole business. | It is more focused on a specified area or segment for the analysis of certain units and not the business as a whole.
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| Reporting | Though financial reports are prepared for the benefit of outsiders and stakeholders in the business, it doesn’t require prompt and quick communication and quick updations from time to time. | Whereas, under the management accounting it is necessary to ensure prompt and quick communication of data for making informed decisions. |
| Description | Only such data and information that could be collected, recorded, and analyzed in monetary terms could be used under financial accounting. | Under management accounting information and data could be collected in both monetary and non-monetary events such as
Competition in the market, political changes, trade cycles, etc., and other factors are reflected in management accounting regardless of the fact that these cannot be measured in monetary terms. |
Therefore, financial & management accounting could be different from each other, but each has its own role to play in the management of a successful start-up business. While financial accounting is helpful in the collection and recording of innumerable business transactions and providing data for study and comparison purposes, management accounting helps in analyzing the performance of the start-up business or formulate business policies & strategies for improvement in the performance of the organization.
Hence, we can conclude that despite the differences between the two on the various basis such as legal compulsion, principles & methodology, nature of transactions, aims & objectives, areas of focus, reporting and confidentiality requirements, etc. management accounting has to be dependent upon financial accounting, hence it is an inseparable part of financial accounting.
