Problem Terminology in Accounting and Business

The world of profitability analytics for internal decision support and accounting suffers from a severe terminology problem. This makes it possible for agreement where there is none and occasionally disagreement where there is none among those in the profession. It is much more damaging for our customers or users who are often confused or bewildered about what they may need; this often forces them back to the traditional regulated world of financial accounting because terminology is back up by laws, standards, and regulations…even though the terminology may not be understood, it feels more solid.

Let me attempt to sort out some terms, and I welcome input on my definitions:

• Financial Internal Decision Support Information – Financial information that is generated based on causal operational, customer, and/or cash relationships. It is not based on rules or standards; it reflects the characteristics of the underlying activity clearly.

• Management Accounting – The range of activities performed by accountants working in business or government. This does not include working in public accounting unless you are the CFO, Controller, or their staff for a firm doing public accounting. Another exception would be personnel working in public accounting whose primary work is as a contract CFO, Controller, or similar role for businesses or governments.

• Cost Accounting – Costing done to meet external regulatory requirements.

• Managerial Costing – Costing done to meet an organization’s financial internal decision support needs. This costing is guided by causality.

• Financial Accounting – Tracking an organization’s finances (assets, liabilities, revenues, costs, and cash flow) in accordance with generally accepted accounting standards which provide the information for required external reporting and may be adapted to provide some internal decision support.

• Profitability Analytics – Tracking an organization’s finances and operations (revenues, costs, and investments) to provide causal internal decision support information for short and long term profitability.

The primary goal in refining the language is overcoming the “One Version of the Truth” myth which financial accounting and external reporting claims exclusive domain over. All models are wrong in some respect, some are useful, and in accounting, some are required. This is true of generally accepted accounting practices and standards, but the limits of usefulness are kept extremely quiet. Who reads the FASB/IFRS conceptual frameworks which explain the model limitations???

I advocate consistency and clarity in our language around these terms to improve understanding and widen the use of important internal decision support modeling.

What’s your opinion? What other terms need to be made clearer in the accounting/business world?