Understanding Financial, Managerial, and Regulatory Accounting and Reporting Concepts

Every enterprise has to file regulatory reports with both Federal and state agencies. Managerial reports are necessary for internal control and decision making, and financial reports are necessary for investors and creditors such as financial institutions. Financial, managerial, and regulatory reports should be reconciled to ensure that the differences between information reported externally and internally, and vice versa, are fully understood.


The reporting burden on enterprises and their associated business and legal entities is significant.

An enterprise consists of one or more business entities for which management has to keep accounts and report financial condition and performance to regulators such as the Internal Revenue Service (IRS) and the equivalent state revenue agencies. Those enterprises that have employees must report payroll information to the IRS, the Social Security Administration, and state revenue and unemployment agencies. Those enterprises that sell securities must report financial condition and performance to the Securities and Exchange Commission (SEC). Reports may also have to be filed with the United States Immigration and Citizenship Services, the United States Department of Labor, the United States Bureau of Customs and Border Protection, and various other Federal and state agencies. Counties and municipalities may require reports too. Those enterprises doing business outside the United States may have to file reports to foreign governments. Taxes, duties, and fees are paid either with the report filings, or separately, depending on regulatory requirements. If paid separately, the payments have to be reconciled to the report filings. Legal entities may have to report financial condition and performance to regulators such as state corporation agencies.

Management must measure both financial and non-financial performance within and across the various entities that make up an enterprise on whatever schedule is necessary to conduct business. The reports that are prepared for internal use should be available on a "need to know" basis. Indicators for financial performance measurement include revenues, costs and expenses, profits, cash flows, and returns on investment. Financial measurements are based upon rates, quantities of input, volumes of output, and aging. Financial performance must be evaluated in terms of non-financial measures, such as market share and penetration, product usage, employee and customer satisfaction, quality, time-to-market, cycle time, and asset utilization. As information systems become more real-time oriented, some reports may be available on demand.

Management must also report financial condition and performance to external investors and certain creditors such as financial institutions, and to the SEC and other regulators when applicable, that are in conformity with Generally Accepted Accounting Principles (GAAP). These reports are prepared according to standards for which the financial condition and performance of the enterprise can be measured against others on a consistent basis. These reports include financial statements of cash flow, income, and condition (balance sheet). The accompanying notes are an integral part of the financial statements, and contain items such as commitments and contingencies that may have a significant impact on the future financial condition of the enterprise. Management must be cautious about the use of non-GAAP measures in external financial statements. However, there may be rare circumstances where it is necessary to depart from GAAP if a material misstatement would otherwise occur. In such cases, the causes and effects must be disclosed. Estimates and judgments must be used on a consistent basis.

In the United States, GAAP is influenced by the SEC, the Government Accounting Standards Board, the Financial Accounting Standards Board, and the American Institute of Certified Public Accountants. Other countries have their own equivalent of GAAP. The International Accounting Standards Board develops international financial reporting standards.

In the ideal world, financial, managerial, and regulatory reports would be prepared from a set of accounts in a single database. In reality, this may not be practical because of limitations in accounting processes and systems. However, whenever reports are prepared, regardless of source, they must be reconcilable, and the differences must be understood.

Whatever the reporting needs of management, attention must be paid internally to what is being reported externally, because if the information is necessary for external parties, it must be relevant internally. Management should also be aware of internal financial information that is non-GAAP based from differing treatment of period and product expenses.

Severe penalties can result from erroneous information reported externally, especially to regulators, investors, and financial institutions.

Financial Accounting and Reporting Concepts

  • Business entity assumption - the entity for which accounts are kept and reports are prepared
  • Going concern assumption - the entity will operate indefinitely
  • Monetary unit principle - accounting and reporting is in a stable currency, unadjusted for inflation
  • Periodicity principle - reports are prepared in consistent time periods
  • Revenue recognition principle - accrual basis (revenue is recognized when realizable and earned) or cost basis (revenue is recognized when cash is collected)
  • Cost principle - acquisition cost is recognized except for certain assets and and almost all liabilities that are recognized at fair value
  • Matching principle - expenses (expired costs) incurred to generate revenue must be matched with earned revenue in the same period - until revenue is earned, expenses incurred to generate revenue are capitalized as product costs (fully absorbed or inventoriable)
  • Conservatism principle - when alternatives are available, methods are based on recording the higher expense or lower revenue, or the lower asset or higher liability
  • Consistency principle - same principles and methods are used from period to period
  • Disclosure principle - relevant information must be reported in financial statements and notes
  • Materiality principle - significance of items must be considered when reported
  • Objectivity principle - financial statements are prepared from reliable and traceable sources

Managerial Accounting and Reporting Concepts

  • Plans and budgets
  • Sales funnel for submitted, presented, and closed proposals (booking of unearned and earned revenue)
  • Cost allocation and transfer pricing
  • Standard costing
  • Variable (direct) costing
  • Marginal costing
  • Activity-based costing
  • Functional, process, product and/or service, and market costing
  • Project costing
  • Branch and departmental reporting
  • Cost, profit, and responsibility center reporting

Regulatory Accounting and Reporting Concepts

  • Taxes (employment, excise, franchise, income, property, sales, use, and withholding)
  • Customs duties
  • Fees
  • Licenses and permits
  • Employment
  • Environmental
  • Insurance
  • Real estate
  • Securities
  • Zoning

When reconciling regulatory reports to financial reports, attention must be paid to uniform capitalization rules (UNICAP) as adopted by the IRS, which differ from GAAP.

When reconciling managerial reports to financial reports, attention must be paid to differences in revenue and expenses by time period resulting from those non-GAAP managerial accounting techniques that do not employ the matching principle. Techniques such as variable (direct) costing and marginal costing do not because they expense fixed costs within periods instead of against products.

Understanding financial, managerial, and regulatory accounting and reporting is an enterpriship (entrepreneurship, leadership, and managerial) competency.

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