Financial accounting and its impact on small and medium-sized enterprises in Kuwait

Accounting has been recognized for its significant role in managing corporate and project budgets for many years. However, accounting has numerous branches that small and medium enterprises in Kuwait are keen to understand well in order to manage their operations efficiently. Among the most prominent of these is financial accounting. What is its role? And why does it enjoy such importance? Follow the next article to learn detailed information about this topic.

Definition of Financial Accounting

Financial accounting is defined as one of the branches of accounting in which financial data and figures pertaining to companies or institutions are documented and analyzed, and accurate reports about their financial positions are prepared. These financial statements enable the company to make important strategic and administrative decisions related to its future and the objectives it seeks to achieve.

Differences Between Financial Accounting and Management Accounting

Many people confuse financial accounting with management accounting due to their similarities in many principles, but the difference between them lies in the basic objectives and standards of each. Here are the main differences between financial and management accounting.

Basic Objectives

Financial Accounting: Its basic objective is to provide clear reports on the financial positions of companies through preparing financial statements that include the balance sheet, income statement, and cash flow statement. These statements and reports prepared with the assistance of financial accounting are for presentation to investors to clarify the company's position to them, lenders, and some external parties such as tax authorities and regulatory bodies.

Management Accounting: Management accounting focuses on providing adequate information and data to the company's internal management to facilitate proper daily decision-making regarding planning, directing employees, and controlling them. Management accounting helps increase employee productivity, improve their performance, understand costs, and properly control the budget. The data it provides is specific to internal staff in the institution and is not shared with any external parties.

Target Audience

Financial Accounting: The audience for financial accounting consists of external entities that have no direct relationships with the company, such as investors, creditors, governments, and others.

Management Accounting: Management accounting focuses on departments within the company and decision-makers, helping them understand how to make the most appropriate decision for the company's benefit based on the information it provides them.

Accounting Basis

Financial Accounting: The basis of financial accounting is accrual, where it documents both company revenues and expenses without regard to collection and payment dates, enabling it to provide financial statements showing the company's financial position at a specific time.

Management Accounting: Management accounting is based on cost or what is known as modified accrual, as it relies on recording both expenditures and revenues resulting from the company's operations, or may rely in some cases on analytical tools such as costs and budgets that focus on improving and directing the company's internal performance toward the better.

Impact of Financial and Management Accounting on Small Companies

Small companies can utilize both financial and management accounting to ensure optimal results, due to the different roles of each, thus achieving comprehensiveness and integration for the company's internal and external objectives. Here is the role of each:

Financial Accounting: Provides small companies with detailed reports on their financial position, which are required by some external entities such as tax authorities or banks when seeking financing. Without them, the company cannot conduct its business and achieve its growth objectives.

Management Accounting: Works to provide comprehensive reports on the company's financial movements, profits, and whether there are any losses. This helps management clearly determine its position and know in which direction it should move to obtain the best results at the lowest costs and avoid losses.

Importance of Financial Accounting

The importance of financial accounting stems from its direct contribution to improving company strategies and directing it toward making proper daily decisions to improve its internal performance, in addition to its importance in the following matters:

Preparing Financial Statements: Financial statements cannot be prepared without financial accounting. These statements allow the company to know whether its practical activities lead to profit or loss, facilitating proper decision-making in the institution's interest. Financial statements include the statement of financial position and cash flow statement.

Controlling Financial Activities: Financial accounting's attention to recording all transactions conducted by the institution, including imports and exports, provides organized and comprehensive data, helping manage financial resources professionally and reducing errors in financial operations.

Supporting Economic Decision-Making: Due to the high-accuracy financial data provided by financial accounting, this enables making sound economic decisions based on reliable studies, whether by internal management or external parties such as investors.

Evaluating Institutional Financial Condition: Provides comprehensive and regular periodic reports on the company's financial position, enabling the ability to know the capacity for investment and entering new projects.

Analyzing Financial and Economic Performance: Financial accounting provides accurate analyses of the financial position of any company or institution, helping identify strengths and weaknesses in investment and making company decisions more accurate, reducing errors.

How Does Financial Accounting Affect Decision-Making?

Financial accounting helps companies make decisions clearly and based on studied scientific foundations rather than randomly, as it provides all financial data related to the company's transactions, enabling the management team to make appropriate decisions in the institution's interest.

Fundamentals of Financial Accounting

Financial accounting depends on certain fundamentals and principles that help build a reliable foundation for establishing a solid base for financial data and its analysis. Among these principles:

Revenue Recognition Principle: Emphasizes the necessity of recording financial transactions immediately upon their implementation by the institution regardless of the timing of cash receipt.

Cost Principle: This principle refers to the importance of recording assets at the cash value paid for them, providing the company with accurate data about asset values.

Matching Principle: In this principle, revenues and expenses are compared within a specific time period to determine whether the company is experiencing loss or profit.

Consistency Principle: Emphasizes the necessity of following the same accounting program determined from the beginning to compare results with each other from time to time and review financial data and rules during a specific time.

Types of Financial Accounting

Financial accounting is divided into two types:

Cash Basis Accounting: In this type, both revenues and expenses are recorded upon cash payment or collection. This type depends on not recording financial data except when paid in reality in cash. This type is used in most government institutions as they focus more on actual cash flow, and this type is characterized by smoothness and clarity.

Accrual Basis Accounting: In this type, both revenues and expenses are documented upon agreement regardless of actual payment dates or collection time at the end of the fiscal year, where all operations are legally binding whether accrued or cash. This method is adopted by general commercial activities as it provides a comprehensive and clear report on financial positions.

Accounting Challenges Facing Small Companies and Ways to Address Them

There are some accounting challenges facing small companies, including:

Not calculating the company's cash flow appropriately and exaggerating it
Neglecting to record revenues at their proper times, making them inaccurate
Making errors in recording expenses
Delaying payment of required invoices
Assigning one person only with all accounting tasks who lacks sufficient experience
Mixing personal and professional accounts without separating them from the beginning

To address these errors and avoid their occurrence, the following should be done:

Ensure work tax recovery
Maintain tax records for payroll statements
Register employee data and ensure continuous updates
Ensure recording and collecting all financial records
Monitor business progress in the company and whether it leads to the desired goal or not