No matter how big or small your business, the need for a variety of different accounting practices and reports. You need both big picture overviews of the business as a whole as well as refined, detailed analysis of every single dollar coming in and going out. You also need to make sure you are tracking the information that you are legally required to report both to the CSA and to the CRA, both of which have compliance requirements you need to follow.
Because of the different needs of companies, accounting has been divided into different categories. In the broadest terms, there is financial accounting and corporate accounting. In this article, we will talk about the key differences between the two types of accounting and then go into detail about what is involved in each type.
What Is the Difference Between Corporate Accounting and Financial Accounting?
Financial accounting is intended to create external reports. That is everything you put into the legally required reports to the CSA (Canadian Securities Administrators) that your business files periodically. Corporate accounting, on the other hand, is intended for internal use. It is everything you need to make internal business decisions. While there will certainly be a lot of overlap, there are some important differences between the two.
Standards and Requirements
Financial accounting must be done according to IFRS (International Financial Reporting Standards). These are a set of requirements used to standardize the financial reports that companies file so that the information reported is consistent and comparable across different companies. In order to comply with legal requirements, your financial reports need to meet these IFRS guidelines. You’ll learn more about this later on in this article.
Corporate accounting is not held to these standards. You can use whichever formatting and accounting practices make the most sense for your company. Choosing how you want to structure your reports and what information to include can be tricky, though. You’ll learn more about what goes into that decision below.
Type of Information
Financial accounting needs to be not only precise but also based only on verifiable information. These are true and accurate representations of your company as it is. These reports are what the CSA and the wider public will use to make decisions about your company. Should your company ever get audited, these reports are the ones they will turn to.
Corporate accounting, on the other hand, can deal in estimates and hypotheticals. Of course, you still want those estimates and hypotheticals to be realistic and based on fact. You just have a lot more room to play in these reports.
This also means you have room to include different kinds of information that you might not be able to include in your standardized financial reports. By the same token, you can leave out information that you aren’t too concerned about, even if that information is required on your CSA filings.
The ultimate purpose of financial accounting is to comply with CSA requirements and to maintain accurate records for tax purposes. As stated, this type of accounting is mostly concerned with your company’s external reporting and compliance requirements.
The purpose of corporate accounting is very different. The main goal is to provide insights for the purpose of making better business decisions going forward. These different purposes will have a huge influence on the kind of information and the level of detail that is included in each report.
Both are used internally. Even though financial accounting produces reports that are compliant with CSA requirements, the information included in them is still, of course, useful to your business. So, from an internal standpoint, the difference in purpose comes down to reporting vs analyzing. A financial report does just that. It reports on the outcomes for the period. A corporate accounting report digs in and actually analyzes the systems and processes that led to those outcomes. You need both but they each serve different purposes.
Attention to Detail
Financial accounting is concerned only with the outcomes and results a company produced. It has very little interest in how those results were achieved or what bottlenecks or other issues prevented those results from being higher than they are.
These financial reports just want to know what, how much, and when. Moreover, it just wants to know this for the company as a whole, not on a department or system level.
Corporate accounting tends to be much more detailed and much more concerned with the “why” of your company’s results. What contributed to your profits? What hurt your profitability? What can you do going forward to increase efficiency and profitability?
To provide insight into questions like that, your corporate accounting will need to go into much greater detail about how your company is generating profit and using capital.
Financial Accounting 101
Financial accounting is the process of producing CSA compliant financial reports about your company. These cover the broad strokes or big picture perspective of how your company is doing. While it will give some general insights into the overall efficiency, profitability, and stability of your company, it won’t go into too much detail about the specific factors that are responsible for creating that level of efficiency, profitability, or stability. In other words, financial accounting will tell you the amount of profit your company generated but it won’t tell you why or how you did it.
The Basic Concepts of Financial Accounting
In financial accounting, you will need to get familiar with a few key terms. Beyond the actual accounting terminology and practices themselves, you will also be working regularly with the following things:
Quarterly and Annual Reports
Your company’s financial quarters and years can start and end whenever it makes the most sense for you. However, once you have chosen the start and end dates of your fiscal year, you have to stick to it and consistently produce quarterly and annual reports by your deadlines.
Consider using cloud accounting software to make hitting your deadlines easier. Having all your financial information organized and kept in one place will make it easier to generate accurate and complete reports on time.
The balance sheet is a broad overview of a company’s total assets, liabilities, and shareholder equity for the given period. It’s a really great starting point for understanding your company’s profitability, efficiency, and leverage because it allows you to compare your revenue, expenses, assets, and investments easily.
While it is not detailed enough to make any diagnosis, it acts as a great snapshot of your financial health at that moment. If you compare it to balance sheets from previous quarters or years, you can get a quick look at how your financial health is changing over time.
Cash flow statement
The cash flow statement looks specifically at your company’s liquidity. This statement is a summary of all cash and cash equivalents that come in or go out. Investors generally use this as a measure of your stability. Cash on hand is a good sign that you are in a position to meet your obligations and make key investments that will grow your business.
Likewise, if your company is bleeding cash, that is a warning sign that your operations aren’t as efficient as they should be. However, to make any diagnosis as to why your operations are inefficient, you’ll need to rely on corporate accounting practices which we will discuss in detail later on.
Profit and loss statement
The profit and loss statement, sometimes called the income statement, is a summary of your revenue and expenses for the period. This is used as a measure of your company’s profitability. Profitability is a measure of the gap between revenue coming in and the costs and expenses going out.
It’s fine if you are spending a lot as long as you are also bringing in a lot of revenue to offset that. If you aren’t effectively spending your company’s money in ways that help generate more revenue, your profit and loss statement will reflect that.
On its own, the profit and loss statement isn’t too useful, especially in time periods where you invested a lot in areas that won’t pay off until future periods. It’s also less useful for newer businesses that still are in the early phases of growth.
It’s more helpful to compare multiple statements over time to see how your profitability is changing. It’s less important what your actual profitability looks like right now and more important that it looks better compared to previous time periods. If it doesn’t, you should make sure the reason for that is an investment that will pay off later.
Retained earnings statements
Where the profit and loss statement measures profitability, the retained earnings statement is more a measure of efficiency or stability. It tells you how your company is using its profits. How much did your company retain? How much did it pay out to shareholders in the form of dividends?
While there is no objective measure of what an appropriate amount of retained earnings is, this can be used by investors to gauge what your general plans for the future are. If you don’t ordinarily set a lot of profits aside but suddenly, you report high retained earnings, they will likely infer that you are preparing for a large expense down the road, either a significant investment or a potential emergency.
For your part, retained earnings can be a good indicator of your long-term financial health. If your retained earnings are low, you can dig deeper (using corporate accounting) to diagnose why that is. If it’s because you are reinvesting in growth opportunities, cool. If it’s because you aren’t generating enough profit to be able to set anything aside, that’s an early warning sign that something needs to change.
If your retained earnings are high, dig deeper to diagnose that as well. Are they high because you are generating a lot of revenue or because you are keeping your costs low? Are you possibly missing opportunities for growth by not reinvesting those profits somewhere? Is this a long-term situation or just an anomaly from this particular time period?
The Uses of Financial Accounting
Financial accounting has a lot of different uses. Most importantly, it’s useful in keeping your company compliant with the law. However, it also has a lot of other internal and external applications. Here are some of the main ones:
Comply with Reporting Requirements
The biggest reason to do financial accounting is because you have to. You are legally required to provide quarterly and annual reports to the CSA, in the proper format, with the necessary information. Financial accounting is the process of tracking, organizing, and developing those reports.
So, you really just have to do it. But that’s not an inconvenient legal requirement. The quarterly and annual reports are useful to you beyond keeping your company in compliance with the law.
File Accurate Tax Returns
The information you need to include on your company’s tax returns can all be found in your quarterly and annual financial reports. So, come tax season, getting your return filed out accurately and quickly will be a lot easier. You will already have all that information compiled, sorted, and dated properly in your reports.
There will be no need to track down expense reports, receipts, invoices, and other information.
For that same reason, financial reporting is also valuable if you should ever get audited. The CRA agents will be able to look at your financial reports to easily determine if everything matches.
Provide General Financial Information to Stakeholders
Stakeholders include any of your private or public investors, your employees, and anyone else with a stake of some kind in your company. These people will need those statements to get a sense of your company’s profitability, efficiency, and leverage.
They use this information to make decisions about their own financial position and to signal the alarm bell to you if they get worried about something they see in your financial statements. That kind of scrutiny can feel invasive or annoying.
However, it’s actually very useful. If a shareholder expresses concern about something in your financial statement, you need to find a way to explain it and put those concerns to rest. If it’s something you can’t explain, that could mean you’ve got a problem that needs addressing.
Sometimes a financial move that made sense to you or your company internally doesn’t work out like you expect. So, this external scrutiny can help you view those things from an outside perspective and catch errors or problems before they cause too much damage.
General Report of Your Company’s Financial Health
Those balance sheets, cash flow statements, and retained earnings statements are all just as helpful to your company as they are to your stakeholders and to the federal agencies All of these report on the outcomes achieved for the time period and give a good overview of your overall financial health.
They may not tell you why you have a problem you might have but they are useful in telling you where a problem exists and helping you to spot it early. Financial accounting tells you where to look. Corporate accounting helps you analyze and understand what you find.
Accounting and Reporting Standards for Corporate Financial Statements
In Canada, you have to file your quarterly and annual reports with the CSA (Canadian Securities Administrators). The CSA requires all companies to file those reports according to a standardized method known as the International Financial Reporting Standards (IFRS).
To comply with these standards, you need to submit the right set of reports, using the right definitions for revenue and expenses, and include a summary of your accounting practices. The reports that have to be included are:
- A balance sheet that adheres to IFRS reporting guidelines
- A profit and loss statement
- A retained earnings statement
- A cash flow statement
Earlier, you read a brief overview of what kind of information each of those statements covered. You need to make sure that you calculate and report revenues and expenses on each of these statements in accordance with IFRS requirements. These requirements mostly deal with when you can and should report revenue or expenses. It also dictates how you count your inventory and other aspects so that companies are using a “common accounting language.”
Corporate Accounting 101
You have probably started to notice that financial accounting seems to raise a lot of questions. The compliance and legal requirement pieces are straightforward enough. However, as far as the internal uses of those financial statements are concerned, your financial accounting is going to raise a lot of questions about the how and why behind the outcomes you are seeing on your balance sheets and cash flow statements. Corporate accounting is how you answer those questions.
The Uses Corporate Financial Accounting and Reporting
Corporate accounting, sometimes called managerial accounting, is the art of analysis or diagnostics. This is a strictly internal practice to help your company gain a clear idea of why it is in the financial position it is in. In general, the goals of corporate accounting are as follows:
Manage Day to Day Finances
Your financial accounting is all about generating accurate external reports. But corporate accounting is responsible for all of the day-to-day maintenance of your actual finances that those reports are referring to.
In other words, a corporate accountant will handle the work of actually paying your bills, invoicing your customers, allocating money to the different parts of your budget, and so on. Financial accounting just tells you where it came from and where it went after the fact. Corporate accounting actually does the work of moving it.
In larger companies, you may have different divisions in your accounting department for handling different daily tasks like accounts receivable, accounts payable, payroll, and so on. In small to medium businesses, there will likely be a lot of overlap here with a single department or even a single accountant handling all of it.
Regardless of how large your team is, effective accounting software will be essential to making sure you are keeping track of everything. You don’t want a bill to go unpaid because it slipped through the cracks. You don’t want to forget to collect on an invoice because it got lost in a mountain of paperwork.
Continuously Track Finances
While seeing the outcomes of all your operations at the end of the quarter or year is certainly useful, you generally don’t want to wait until the end of a fiscal period to look for problems. With corporate accounting, you continuously track money coming in and money going out as it happens.
This continuous tracking makes it possible to identify a potential problem early, ideally before it actually becomes a problem.
How you choose to track your finances is entirely up to you. There are no standards or compliance requirements with your own internal accounting practices. So, if you want daily reports, go for it. If you want a monthly report on all expenses due for the coming month, you can do that.
You get to decide what you track, how often you get reports on it, and how you define and measure different items like revenue, expenses, and inventory.
Analyze Revenue and Expenses
Perhaps the greatest advantage of corporate accounting is that allows you to analyze the financial position of your company. A financial statement can give you a snapshot of that position but it’s only with a deeper dive, made possible by corporate accounting, that you can actually interpret the factors that made that outcome possible.
This is important to businesses. It’s not enough to know that you are doing well or doing poorly. You need to know what specific things are responsible for the outcomes you are seeing.
Only through corporate accounting, which relies on the wealth of internal financial data, can you understand what generates the most profit, what your biggest expenses are, and what changes you can make to increase profitability or efficiency.
A corporate accounting report can give you a detailed analysis of every single revenue stream and help you explore ideas for optimizing them. It can give you a thorough breakdown of your costs and expenses that allows you to understand exactly how much of a return you are getting for each of them and explore more cost-effective options for each one.
Generate Forecasts and Projections
Another great use of corporate accounting are forward looking projections. You can use your detailed analysis of your current and past financial position, combine that with any investments you have made, and come up with realistic forecasts about where you will be next quarter or next year.
These forward-looking corporate accounting financial statements help you plan for the future, anticipate potential problems, and identify opportunities. You can even generate a variety of forecasts based on various scenarios to answer some “what if” questions. This is extremely useful in making decisions and deciding what future plans have the greatest potential.
These projections can also help you refine your budget. If you know, based on forecasts, that you want to make a particular investment next quarter or next year, you can modify your budget now to start setting some money aside for that investment or otherwise preparing for the change in operations that might occur.
Identify and Address Problems
The level of detail that is possible with financial statements in corporate accounting allows you to have laser-like focus on any problems. A balance sheet or cash flow statement can signal potential warnings, but corporate accounting will drill down and tell you exactly what the problem is.
Once you have identified the specific problem, whether that’s wasteful spending, slow inventory turnaround, declining revenue from a previously strong source, or anything else, you can start addressing it.
You can then use corporate accounting to generate projections based on a variety of potential solutions to your problem to help you decide which solution is likely to be the most effective.
Both financial and corporate accounting are useful for companies of all sizes and the earlier you can develop an organized and coherent system for both, the better. Keeping your records organized and stored in one easy-to-access location is the best way to make sure that you can produce both kinds of reports with ease and, more importantly, with accuracy.
Cloud accounting software makes this easy since you can maintain consistent labeling and storage of all your financial data all in one place that any department can access for the purpose of adding their budgets and financial statements. This makes it a lot easier for your accounting team to quickly and efficiently produce the various kinds of reports you need.
When you save time on the actual production of the reports, you have more time for the important work of analyzing what those reports are telling you and making the right decisions based on that information!