Identify, record, communicate — to whom?
◈ 5 cardsAccounting defined by its three verbs and its decision-maker; financial and managerial accounting separated by user, rulebook and time orientation.
Three verbs and a decision-maker
Accounting is the process of identifying the economic events of an entity, recording them, and communicating the result to someone who has a decision to make. The third clause is the point. Bookkeeping is the record step alone; accounting exists because a bank, an owner, a tax authority or a supplier needs to decide something, and the numbers are the language the decision is made in.
Worked example — one decision, two kinds of accounting
Northlake Nordic Centre Inc. runs a cross-country ski centre in Muskoka. In March its bank asks whether to renew the $150,000 operating line. To answer, the bank needs Northlake's financial accounting:
- Identified: last season's pass sales, café sales, wages, the loan interest, the groomer's amortization.
- Recorded: as entries in Northlake's books, under the rules of ASPE, for the year ended 31 December.
- Communicated: as an income statement, a statement of retained earnings, a balance sheet and a cash flow statement — the same four statements any other borrower would hand over, prepared the same way, about the past year.
The same month, the owner asks a different question: should we buy a second groomer for next season? That needs managerial accounting: an estimate of extra skier-days, the extra fuel and operator hours, the groomer's cost spread over the seasons it would serve. None of it is bound by ASPE, none of it leaves the building, and all of it is about the future.
The three axes that separate them
| Financial | Managerial | |
|---|---|---|
| User | external — the bank, the CRA, investors, suppliers | internal — owners and managers |
| Rulebook | GAAP (ASPE for Northlake) | none; whatever helps the decision |
| Time | the past period, reported at a date | the future, estimated |
| Output | the four statements and notes | budgets, cost reports, the CM income statement |
The contribution-margin income statement you will build in Module 9 sits in the right-hand column: it is a managerial tool, and it never appears in the ASPE statement set a bank receives.
Sorting questions
Try these six. Should we raise day-pass prices by $3? — managerial. What was net income for the year? — financial. How much is owed to the bank at 31 December? — financial. How many skier-days do we need to cover the lodge's fixed costs? — managerial. What did the café's food cost as a share of café sales last year? — financial (it is a past-period figure from the statements), though managers will use it too. What will next season's wages be if we open the trails an hour earlier? — managerial. The test is not who is asking; it is whether the answer is a GAAP-bound report about the past or a free-form estimate about the future.