Werner Seebacher - Management Accounting. Part 2 – Profit Plan, Finance Plan, Budgeted Balance Sheet

For this reason there are substantial differences in “Management Accounting.” compared to classical textbooks on accounting/controlling or to standard literature in the field of accounting/controlling.

In order to give a total, general overview of the connections in accounting – independent of national and international trade and tax laws – neither references to legal texts are given nor paragraphs or legal regulations are mentioned.

In order to take the aspect of convergence in accounting/controlling into account, “Management Accounting.” integrates central elements of accounting. Internal and external accounting are connected as well as past and future, planned and current data.

For this reason accounting must be seen in a broader sense – referring to balance sheet, profit/loss account, results statement, contribution margin costing as well as to corporate planning, profit plan, finance plan, budgeted balance sheet, key figures – and should not be understood as accounting in the narrower sense of book-keeping (and balancing).

The approach that is used in “Management Accounting.” focuses on two central connections which form the basic structure of presenting the economic activities in accounting/controlling of an enterprise:

The first of these two connections is the basic connection between Balance Sheet and Profit/Loss Account.

The second decisive connection is based on the interaction of the components result (profit or loss respectively), liquidity (solvency) and balance sheet which – with a view to the future – are presented through the elements Profit Plan, Finance Plan and Budgeted Balance Sheet.

Combining the two groups of topics Balance Sheet | Profit/Loss Account and Profit Plan | Finance Plan | Budgeted Balance Sheet, the circle of the effects of economic activities of an enterprise closes. The connection of accounting/controlling as a whole opens up.

The two central groups of topics which are presented in “Management Accounting.” – Balance Sheet | Profit/Loss Account and Profit Plan | Finance Plan | Budgeted Balance Sheet meet exactly at the interface between past, current and future situation:

The group of topics: Balance Sheet | Profit/Loss Account deals with the past or the current situation of the enterprise.

The group of topics: Profit Plan | Finance Plan | Budgeted Balance Sheet deals with the future development of the enterprise.

The basic elements which are used remain the same in both groups of topics, also the contents and connections. What changes is the way they are considered and the terms which are used.

The presentation of the fundamental contents of and the connections between the the elements Balance Sheet and Profit/Loss Account is dealt with in “Management Accounting. Part 1 - Balance Sheet | Profit/Loss Account”.

“Management Accounting. Part 2 - Profit Plan | Finance Plan | Budgeted Balance Sheet” deals with the central “Accounting/Controlling Overall Context“, the connection between the elements Profit Plan, Finance Plan and Budgeted Balance Sheet. The connections described are presented and annotated in form of case studies.

2. Survey of the Contents

“Management Accounting.” covers the range:

- 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 referring to the elements and connections mentioned here, can be found in “Management Accounting. Part 1 - Balance Sheet | Profit/Loss Account” on the one hand, and in “Management Accounting. Part 2 - Profit Plan | Finance Plan | Budgeted Balance Sheet” on the other hand, and also as an overall presentation in the textbook “Management Accounting.” which forms the basis for „Management Accounting. Part 1“ and “Management Accounting. Part 2”.

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).

1 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 are presented in “Management Accounting. Part 1 - 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.

1 Figure 2: Profit/Loss Account

Detailed explanations concerning the profit/loss account are presented in “Management Accounting. Part 1 - Balance Sheet | Profit/Loss Account ”.

2.3. Balance Sheet | Profit/Loss Account