12.2.1 Financial Accounting vs. Management Accounting

General Ledger systems are designed to yield Financial Accounting results such as Balance Sheets, Income Statements, Sources & Uses Statements, and other regulatory reports that must be compiled according to international or local accounting standards such as International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (US). In addition to these external reporting functions, GL systems serve internal control and management accountability functions. GL systems need to be able to account for and answer questions such as:

  • How much is being spent on occupancy expenses?
  • How much is being spent on salary and benefits expenses?
  • How well are we managing IT and network costs?
  • Are cost center managers under- or over-budget?
  • How are we accounting for cash and receivables?
  • How are we accounting for depreciation, goodwill, and other intangibles?
  • How are we managing cash flow (cash basis accounting vs. accrual basis accounting)?
  • Can we demonstrate appropriate segregation of duties and other internal controls?
  • Can we track General Ledger balances back to source transactions and documents?
  • Can we satisfy our external stakeholders including auditors, regulators, and investors?

Management accounting systems are often derived in whole or in part from Financial Accounting systems but are designed to answer a different class of questions such as:

  • Which products, customers, geographies, lines of business, divisions, and channels are most profitable?
  • How can we influence customer behavior to maximize profitability?
  • How well are we controlling risks including interest rate risk, foreign currency risk, credit risk, fiduciary risk, legal risk, operating risk, and market risk?
  • Can we measure our profitability in all dimensions on a risk-adjusted basis?
  • How can we optimize our external fee structures and internal incentives to optimize risk-adjusted profitability?
  • Are we properly organized to optimize internal incentives?
  • How well are we managing capacity?