Werner Seebacher - Management Accounting

- from the effects of business activities regarding the aspects of profit/loss, liquidity or solvency respectively (presented through surplus of or demand for cash) and balance sheet,

- via the central elements of accounting/controlling: Balance Sheet, Profit/Loss Account, Profit Plan, Finance Plan and Budgeted Balance Sheet,

- as well as to their development from a time-wise point of view – from the past over the current situation (each presented through Balance Sheet and Profit/Loss Account, possibly also through a Cash Flow Statement) to the future (presented through Profit Plan, Finance Plan and Budgeted Balance Sheet).

The following short overview of the elements and connections used is meant to make the structure of “Management Accounting.” easier for the reader and also to help with assigning the contents.

The following elements are presented in this overview:

The presentation of all details of the elements and connections mentioned here happens in the two main parts: Balance Sheet | Profit/Loss Accountand Profit Plan | Finance Plan | Budgeted Balance Sheet.

2.1. Balance Sheet

A balance sheet is always a look at the enterprise at a certain point in time. It contains permanently stock values.

The balance sheet presents – referring to a certain point in time – the goods or assets an enterprise has available at exactly this moment and in what way the enterprise is financed at this moment (with equity or debt capital / liabilities).

Figure 1: Balance Sheet

On the left side of the balance sheet, the assets side, the assets of an enterprise are presented, structured into fixed assets (non-current assets) and current assets. On the right side of the balance sheet, the liabilities side, the source of the financial means of the enterprise is presented, differentiating between equity and debt capital.

Detailed explanations concerning the balance sheet follow in chapter 3 - Balance Sheet | Profit/Loss Account.

2.2. Profit/Loss Account

The profit/loss account, in contrast to the balance sheet, is a period of time-oriented reflection of an enterprise, a consideration of the economic development of an enterprise in the course of time. The profit/loss account contains permanently flow values.

In the profit/loss account the result of the business activity (the profit or loss of the enterprise respectively) is presented – in form of the difference between expense and income. The income or turnover/sales which are achieved by selling products, goods or services are compared to the arising expense in the enterprise and the result of the comparison leads to the profit or loss of the enterprise.

Figure 2: Profit/Loss Account

Detailed explanations concerning the profit/loss account follow in chapter 3 - Balance Sheet | Profit/Loss Account.

2.3. Balance Sheet | Profit/Loss Account

The connection between balance sheet and profit/loss account can be seen in the result of the profit/loss account – in the profit or loss.

A profit which has been compiled in the profit/loss account increases the equity in the balance sheet of the enterprise, a possible loss reduces the equity in the balance sheet of the enterprise.

Figure 3: Balance Sheet and Profit/Loss Account

2.4. Balance Sheet | Profit/Loss Account | Profit Plan | Finance Plan | Budgeted Balance Sheet

In the transition from the past-oriented to the future-oriented consideration of an enterprise, the elements mentioned before, Balance Sheet and Profit/Loss Account are replaced by the elements Profit Plan, Finance Plan and Budgeted Balance Sheet.

The Profit/Loss Account is replaced by the Profit Plan.

The Balance Sheet is replaced by the Budgeted Balance Sheet.

The Cash Flow Statement (which has not been presented here) is replaced by the Finance Plan.

Profit plan, finance plan and budgeted balance sheet present the future economic or financial development of an enterprise.

2.5. Profit Plan

The profit plan which is presented here based on the structure of a results statement or contribution margin costing respectively, represents the future-oriented consideration of the expected or planned profit situation of an enterprise. With reference to the contents or the result which must be compiled (profit or loss) the profit plan equals the profit/loss account which is used for assessing the profit situation of an enterprise in a past-oriented way.

The result of both calculating schemes leads to the profit or loss of the enterprise which is denominated with various specific terms depending on the structure it is based on.

Figure 4: Profit Plan and Profit/Loss Account

Detailed explanations concerning the profit plan follow in chapter 5 - Profit Plan | Finance Plan | Budgeted Balance Sheet.

2.6. Finance Plan

The compilation of the profit plan is followed by the finance plan. Based on the planned profit/loss after tax from the profit plan, the development of the liquidity or solvency of the enterprise respectively is planned in the finance plan. The result of the finance plan is the planned surplus of cash or demand for cash of the enterprise.

The planned profit from the profit plan is converted into cash flows in the finance plan.

Figure 5: Finance Plan