An accountant performs financial functions related to the collection, accuracy, recording, analysis and presentation of a business, organisation or company’s financial operations. In a smaller business, an accountant’s role may consist of primarily financial data collection, entry and report generation.
Middle to larger-sized companies may utilise an accountant as an adviser and financial interpreter, who may present the company’s financial data to people within and outside of the business. Generally, the accountant can also deal with third parties, such as vendors, customers and financial institutions.
Definition: Accounting is a process, which systematically and comprehensively records business events and transactions, and translates it into the financial information of the business entity to assist the stakeholders in the decision-making process.
It is that branch of accounting, which involves the recording of the transactions, inclined towards the preparation of trial balance and final accounts.
Cost account is the accounting discipline, which deals with costs, i.e. the unit costs of the goods produced and services provided. It helps the management of the organisation in fixing the price, controlling costs and providing relevant information for the purpose of decision making.
The accounting system which supplies the necessary information to the management, for rational decision making. The information may be concerned with funds, costs, profits and losses and so forth. This information is helpful in determining the effect of the decisions and analysing the performance of the entity.
The role of management accountant includes collecting, recording and reporting financial data from several units of an organisation, observe and analyse their budget and suggest their funding and allocation. This includes the estimation of cost of raw material, labour, manufacturing, sales and advertising, social media networking, lobbying and company’s internal operation cost. A management accountant needs to coordinate with all concerned departments to make an overall analysis of company’s functioning capital and availability of funds and then he or she has to report all the information to senior management and board of directors. Thus a CFO is a source of information required by directors and CEOs to take decisions.
Management accounting’s main role is budgeting, for a small company budget are a guide to all expenditures. Small businessmen decide a budget every year to fix their expenses on each process that is operation and production cost and then further investment. Thus here, a management accountant has to review historical data to prepare an accurate prediction of a year’s future expenses. A budget ensures coordination between the entrepreneur and his employees in implementing all the plans for the year ahead.
Time is very important for making all plans for a company’s management. A management accountant’s functions are time-bound since he or she has to make predictions, budgets and report within a stipulated period so that they can be implemented at the time of need. Timely forecasting is needed with taking consideration of market uncertainties. The budget needs to be according to the available working capital and exposure to market risks; thus, a certain amount of accuracy is very necessary. Before reporting the owners, a management accountant has to ensure the accuracy of all information gathered to help in correct decision making.
A management accountant needs to be aware of everything, be it a political situation that affects the market, inflation, other exposures in the market, competition, cost of labour, raw material, internal operations, coordination among different departments within a company as well as its interaction with rest of the business world and social media.
The accounting system that deals with the tax return and its payment, instead of preparation of final accounts of the enterprise, is called tax accounting.
This branch of accounting is commonly termed as social responsibility accounting. It aims at unveiling the facilities provided by the entity to the society, in terms of medical, housing, education, and so forth.
These accounting branches have been developed as a result of rapid economic development and technological improvements that increased the company’s scale of operations. Due to this very reason, management functions have become complicated and resulted in the development of branches.
Business technology software plays an important role nowadays in preparation of financial records, their analysis and forecasting. They help in the dissemination of digital information and speedy processing of data for the formulation of budget and its interpretation. This software provides tools that take the required track records and automatically create financial predictions. Thus time and effort to calculate this lengthy information gets reduced, saving the accountant from lots of burdens.
The first and foremost function of accounting is the systematic record-keeping of the financial transactions, on a regular basis.
Another important function of accounting is to communicate the results, i.e. the net profit or loss to the users, with the help of financial statements, so as to help the interested parties in rational decision making.
The accounting statements must be prepared, keeping in mind the compliance with the relevant laws.
Accounting not only keeps a record of all the business assets but also ensures no unauthorised use of assets or property belonging to the enterprise.
Accounting plays a very important role in the ascertainment of profit earned or loss sustained by the enterprise in an accounting period. This is possible only when a proper record of all the business transactions, revenues and expenses are maintained.
With the help of the financial statement, i.e. Balance sheet and profit and loss account, the financial position of the enterprise can easily be ascertained.
The fundamental objective of accounting is to keep complete records of the business transactions, so as to determine the financial performance and position of the enterprise and convey the information to the user groups such as shareholders, employees, creditors, suppliers, government and other groups.
The purpose of accounting is to provide financial information to the stakeholders of the business: management, investors and creditors. Accounting measures and summarises the activities of the company and communicates the results to management and other interested parties.
Accounting can be classified into two forms: management and financial. Management accounting helps to run the business, while financial accounting reports on how well it’s running.
Managerial accounting produces internal reports that are designed for management and are used for decision-making. These reports are modified and adapted to the specific purposes and needs of individual managers and are not usually released to parties outside the company.
A few examples of management accounting reports are aging of accounts receivable, inventory levels, monthly sales and status of accounts payable. Internal accounting reports are also used for the preparation of budgets and forecasts.
Running a business requires accurate data about the company’s assets, liabilities, profits and cash position. Accounting provides this crucial information. Accounting plays a significant role in evaluating the viability of investments. Proper consideration of investment demands a careful analysis of costs and projections of expectations for future cash flows. Certain criteria, such as determining hurdles to return on investment, must be met.
Consider the decision managers often face of whether to invest in a new plant or expand the existing facilities. A choice might be to invest $1 million in a new production facility or spend $300,000 to expand a production line. Each alternative will have different cash outflows in the beginning and varying future cash inflows. Each approach will have a different return on investment. So, which one should management choose? The company’s accountants will analyse the figures for each investment, calculate the rate of return for each project and present their findings to management.
This is a situation where accounting procedures produce the relevant financial data that management needs to make intelligent decisions. They also have to explore the various ways to finance these investments. Decisions must always be backed up with valid facts and figures.
Accountants often face conflicts between upholding values central to their profession and the demands of the real world. Balancing these competing demands speaks to the very heart of being a professional in contrast to simply having a job or performing a function. Professionals are expected to exercise professional judgment in performing their roles so that when times get challenging, they do not undertake actions that will result in the profession losing the public’s trust as protectors of public interest.
Ethical codes for professional accountants globally compels professional accountants, regardless of the roles that they perform, to uphold values of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. However, competing pressures can put professional accountants in challenging and often difficult situations. These conflicts revolve around ethics, commercial pressures and the burden of regulation.
Situations may occur where professional accountants in businesses are expected to help the organisation achieve certain financial outcomes. In some of these cases, the required action may risk compromising compliance with accounting and financial reporting rules. Professional accountants in businesses encounter tension in these situations. As an example, accountants in organisations may face pressures to account for inventories at higher values or select alternative accounting methods which are more financially favourable to the company. However, these actions may be contrary to what are allowable in the accounting standards or to what the professional accountant may feel comfortable with.
Businesses must comply with government regulations and pay taxes on corporate income, Social Security taxes and sales. Accountants make sure the filings are accurate and on time. Any mistakes made when reporting income can result in fines and penalties.
Successful organisations create plans to achieve their objectives. These plans include cash flow projections, sales planning, purchases of fixed assets and projecting inventory levels. Accounting analysis of historical data will provide the basis for making forecasts and developing plans to meet those targets.
Budgets are essential to running a successful business. Accounting uses historical data to form the basis for future budgets and cost controls. With this information, managers can prepare overhead expense budgets and sales plans and create cash flow projections. Then they monitor the regular accounting reports to make sure costs stay within the budgets.
Manufacturing companies use cost accounting to calculate the cost of making products, determine break-even sales volumes and set optimum inventory levels. Managers need to know how much it costs to make their products to develop pricing strategies that allow the company to make a reasonable profit.
An important responsibility of management is to control costs. However, to do this, managers must have predetermined standard costs of operations to use as yardsticks for measurement.
Take, for example, a company that manufactures yellow widgets. The company’s accountants have determined that manufacturing costs for this product include $2.57 in materials, $8.38 in labour and applied production overhead of $3.16 per unit. The total cost of production for a yellow widget is $14.11. The selling price is $23.51, giving the company a gross profit margin of 40 per cent.
With these figures in hand, management can monitor production costs on a weekly or monthly basis to make sure the costs of production do not exceed these standards. If accounting reports show a discrepancy above the intended cost of manufacturing, then management knows to step in, find the cause of the problem and take corrective action.
Accurate accounting of manufacturing costs for each product is essential to the development of a sales plan and a projected product mix. More than likely, each product will have a different gross profit contribution, and management must establish sales goals for each item to reach the overall gross profit level needed to cover overhead and produce the target net profit.
A description of the multifaceted role of professional accountants in business is not complete without discussing the duty that the profession owes to the general public, as a profession that has been bestowed a privileged position in society, the accountancy profession as a whole deal with a wide range of issues that has a public interest angle. In the case of professional accountants in business, not only must they maintain high standards, but they also have a key role to play in helping organisations to act ethically.
Closely linked to the protection of public interest is the notion that public accountants need to be trusted to provide public value. Accountants will lose their legitimacy as protectors of public interest if there is no public trust. The accountancy profession has a wide reach in society and global capital markets. In the most basic way, confidence in the financial data produced by professionals in businesses forms the core of public trust and public value.
Financial ratios are vital metrics used to gauge the performance of all aspects of a company’s condition and operations; accounting provides the data required to construct these ratios. The current and quick ratios measure a company’s liquidity. Profit margins and expenses are reported as percentages of sales and compared to budgeted benchmarks. Financial leverage is a ratio of total debt to capital investment.
Managers often meet with department heads to discuss possible changes in strategies and operations. They explore various “what-if” ideas. For example, what would happen if the company decided to improve profits by cutting administrative salaries? Would that be a good idea? Probably not. Employees don’t like cuts in their wages.
But what if the managers chose to stimulate sales by lowering the selling prices of the products? Profits per unit would go down, but the increased sales volume would more than make up the decrease. Accounting analysis and projection would help clarify the results of this decision and determine if that strategy would be a wise move.
Financial accounting produces reports for external users, such as owners, investors, employees, creditors, unions and government agencies. These reports for external use are the profit and loss statement, balance sheet and cash flow statements. Unlike internal management accounting reports, financial statements prepared for outside users are compiled using Generally Accepted Accounting Principles.
Financial accounting reports whether the company made an adequate profit and how likely it is to pay dividends to shareholders. Curious investors will examine the financial statements to gauge the safety of their investments and potential for future growth and increase in value. Employees will look at the statements and get an idea of whether they can expect raises or increased contributions to pension funds.
Accounting in business is a key pillar in organisations helping to create and sustain value and growth. Their ability to continue to fulfil these roles in the face of constant environmental changes is vital to their continued relevance. Professional accountants in business are also the front runners when it comes to upholding the quality of financial reporting and providing the broader public with reliable financial information.
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