Accounting provides management with data needed to determine whether a business is at a loss or a profit, how much debtors owe, how much a business owes others, and other financial information. Accounting measures business transactions and as such can help steer managers in the right direction with solid information, not gut-feelings. Basically accounting is a tool for management to employ to help make sound business decisions on a timely manner. For instance, if by using accounting information, managers notice that the trend is for sales to decrease, then they can take measures to stop this trend. Maybe they need to change prices or decrease expenses to handle the down-trend. The key is that accounting gave them the clue that something may not be going according to plan, playing an important role in business management.
1. Get your cash numbers. Cash is the most important business asset. Managers should use accounting information to see where the business is cash-wise and to plan for financing and other strategies for short-term and long-term planning. For example, if the cash balance is $50,000 and there is a need for a large purchase of $120,000 for equipment, a manager may decide to finance the entire purchase instead of using the $50,000 balance. Many managers and business owners use ratios to analyze financial data. For example current ratio, a popular way to verify how a business is able to meet its short-term debt, is calculated by dividing current assets by current liabilities. The higher this ratio, the better off a firm is.2. Mind your budget, which is an
estimate of income and expenses for a certain point in time. It is a guide to
ensure that a business is on track, as planned. Managers should be aware of
budget numbers and how they compare to actual numbers. For example, if a
postage expense number is almost over budget, managers can research the reason
for the excessive expense in that line item and make decisions about that. If
actual versus budget reports show a trend towards more expensive inventory
costs, then managers may consider renegotiating terms or prices or even
changing suppliers.
3. Follow up on accounts receivable.
Accounting can help management figure out who owes the company money and for
how long. An "ageing receivable report," a useful detailed accounting
report, can be used by managers to identify slow paying clients and to follow
up on them, preventing possible loss of income. Cash is king, especially with
small businesses, and the faster customer pays, the better off the firm is to
meet its financial obligations.
Financial Accounting
Financial accounting is focused on
providing accounting reports and analysis to other areas of the business.
Financial accountants are responsible for the creation and issuing of the
company's financial statements, providing accurate and timely information to
management and ensuring that all regulatory reporting requirements are met. In
financial accounting, the goal is to consistently provide the valuable,
accurate and reliable information.
The issuing of the financial statements
is the responsibility of the financial accounting department. These statements
summarize the business's activities for the year and are used by shareholders,
banks, employee bargaining units, and the general public to evaluate the
financial worth of the company. The statements are audited by independent
accountants to validate the information and provide assurance to readers.
The financial statements are comprised
of five documents; balance sheet, income statement; cash flow and owners or
shareholders equity and notes. Notes to the financial statement are written
explanations of items in the financial statements. Any unusual items or change
in procedure that has impact on the financial statements are detailed here.
The balance sheet is a summary of all
the assets and liabilities at year's end. The accounts reflect the total amount
of cash and liquid assets on hand, the amount of debt the company is carrying,
and how much money was spend in various categories. Financial accounting firms
perform analysis of these values using ratios and other calculations to
determine the financial health of the company.
An income statement is a critical
component in financial accounting. It provides a clear list of all the sales
for the year, the expenses and the net profit or loss of the firm. This
statement provides insight into the sales performance for the year and the
overall profitability of the firm.
A cash flow report provides details on
funds received and disbursed. Funds received or lost from interest bearing
investments are detailed here.
The statement of owners' or
shareholders' equity shows the total net income from the year and how it will
be distributed among the shareholders or reinvested in the business. Publicly
traded companies must provide the number of shares issues, the type of share
and the amount of divided to be paid on the shares, based on the articles of
incorporation and the shareholder agreement.
All certified public accountants have
complete intermediate and advanced courses in financial accounting. There is no
additional designation for a financial accounting specialty. The skill set for
a financial accountant must focus on analysis and data manipulation software
and tools.
Concept
The concept of financial accounting
centers around a basic equation: assets equal liabilities plus owner’s equity.
This equation provides the building blocks for the remainder of accounting
principles. Other basics include debits and credits, selecting an accounting
method for recording financial transactions, maintaining the general ledger,
and preparing financial statements. Individuals often learn the basics of
financial accounting by either working at a job that involves accounting or
pursuing an educational degree with an accounting specialization. Through these
options, individuals will learn what is often called the language of business:
accounting.
The accounting equation includes the
three main categories for all financial information: assets, liabilities and
owner’s equity. Assets are all items a company owns and uses to generate sales
revenue and profit. Current assets last 12 months or less, and include items
like cash, inventory, short-term securities and accounts receivable. Long-term
assets represent buildings, equipment, vehicles, land and other major purchases
that help the company transform raw materials into sellable products.
Liabilities include money borrowed and owed to other individuals or businesses.
These are also current or long-term, with the former including accounts
payable, credit lines and short-term loans, and the latter including mortgages
or long-term loans. Owner’s equity represents the portion of income the
business owner retains as his portion of net income.
The basics of financial accounting also
require each transaction entry to have a debit and credit. Debits represent the
left side of T accounts in the general ledger and credits represent information
on the right of the account. Debits increase asset accounts and decrease
liabilities or revenue accounts; credits have the opposite effect of debits for
these accounts.
The basics of financial accounting also
helps a company to keep an accurate ledger that consists of all the accounts it
will use to record financial transactions. The aggregation of these accounts
will result in a financial statement providing all users of the statement with
an accurate presentation of the company’s financial health. Income statements
list the revenue and expenses; balance sheets list the assets, liabilities and
owner’s equity; and the statement of cash flows includes all movements of cash
within the company.
Importance and Scope
Financial accounting, which some call
"the language of business," is important to companies of any size.
For small-business owners, the importance of financial accounting sometimes is
overlooked. By understanding how useful financial accounting can be to the
success of a small business, you can focus on the qualities that can take your
business the furthest.
Recording Transactions
A major use of financial accounting is
for the recording of transactions. This function of accounting is also known as
bookkeeping. Small-business owners use financial accounting to record business
activity in the company's ledger. Because financial accounting uses the
double-entry system, each transaction affects two accounts, representing the
two sides to a transaction. For example, if a business owner purchases land for
cash, he would record a debit to the land account to represent the receipt of
land, and a credit to the cash account to represent the outflow of cash. This
use of accounting is important to small-business owners because it provides a
methodological approach to describing the activities of business.
Communicating Information -- External
Small-business owners use financial
accounting to communicate information to external parties. People and
organizations that use the financial information of a company, but are not part
of the company, are known as external users of financial statements. Owners
communicate the financial health and well-being of a company to external users
through the financial statements, which are the end result of recording
financial accounting transactions. External users will examine the financial
statements and compare the results to their own expectations, forming an
assessment of the company. Common external users include banks, suppliers and
leasing companies.
Communicating Information -- Internal
While managerial accounting is more
geared towards internal users, financial accounting is also used for internal
information communication. Internal users of financial accounting information
include the finance team and employees who may be interested in profit-sharing
or stock-based compensation agreements. Small-business owners can use financial
accounting information to share company strengths and weaknesses with
employees. For small public companies, a common metric is the company's share
price. Owners may tie bonus and compensation amounts to share price and
encourage employee productivity accordingly.
Analysis and Comparison
Small-business owners may use financial
accounting information to analyze competitors and evaluate investment
opportunities. Because financial accounting is governed by generally accepted
accounting principles, the financial statements of different companies are
comparable to one another. This basis for comparability provides a standard
method of analysis. Small-business owners can compute financial ratios using
the company's financial statements, and compare the ratios to benchmarks or
other competitors.
Management Accounting
Management accounting is a specialized
sub-set of accounting, focusing on internal needs of businesses. While
financial accounting focuses on external reporting and history, management
accounting focuses on current information and the needs of in-house management.
Both management and financial accounting work together to give management and
external users the information required. Often a management computer system
feeds into a financial computer system, providing users and stakeholders with
complete cost information.
Popular with manufacturing
environments, management accounting focuses on assigning costs to processes.
Instead of dealing with debits and credits, accounts or financial statements,
as financial accounting does, this style of accounting quantifies details,
quality controls, and expectations. Cost Accounting is one of the main
principles of management accounting. It is used to determine budgets, costs,
and profitability of products or departments.
Cost accounting deals with 3 main
areas. The first is raw materials, or the resources needed to complete a
product. This could include, for example, costs of leather and wood to build a
piece of furniture. Labor, or the salaries of employees working on a process,
is the second area, and would include the cost of a carpenter building a piece
of furniture. Third is indirect costs, also known as "overhead;" this
would include the cost of liability insurance in a plant.
Standard cost accounting includes the
concepts of fixed and variable costs, as analysis are performed to identify how
variable costs affect the cost of a product excluding fixed costs and
vice-versa. Budgets are created based on standard costs and variances are
identified and analyzed. It is a popular tool used by many manufacturing plants
and other businesses.
Another way of looking at management
and cost accounting is by using Activity Based Accounting, also known as ABC.
This method tries to measure actual activity costs to assign indirect costs to
products. It is usually expensive to implement this system, since activities
and ways of measurement may vary dramatically.
Most management accounting processes are performed using computer systems that can handle large amounts of data and make the data usable by users. Computer systems and the Information Technology (IT) department are very important in management accounting. With this importance comes expenses associated with the IT department; that is why IT cost transparency is part of management accounting. There is a need for IT costs to be measured and controlled the same way that other processes are.
Need
Business owners often use management
accounting to track, record and report financial information for managerial
review. Management accounting does not usually follow any national accounting
standards. Business owners can design management accounting systems according
to their company’s business operations or managements need for business
information. Management accounting has several advantages. These advantages
usually coincide with the ability for companies to improve operations and
overall profitability. Business owners can also create a competitive advantage
by developing cost allocation processes in their management accounting function.
Reduce Expenses
Management accounting can help
companies lower their operational expenses. Business owners often use
management accounting information to review the cost of economic resources and
other business operations. This information allows owners to better understand
how much money it costs to run the business. Business owners can also use
management accounting to conduct an analysis on the quality of economic
resources used to produce goods or services. If overall product quality would
not suffer by using a cheaper raw material, business owners can make this
change to reduce production costs.
Improve Cash Flow
Budgets are a major part of management
accounting. Business owners often use budgets so they have a financial road map
for future business expenditures. Many budgets are based on a
company's historical financial information. Management accountants
will comb through this information and create a master budget for the entire
company. Larger business organizations may use several smaller budgets for
divisions or departments. These individual budgets usually roll up into the
company's overall master budget. The main purpose of budgets is to
save the company money through careful analysis of necessary and unnecessary
cash expenditures.
Business Decisions
Management accounting often improves
the business owner’s decision-making process. Rather than making business
decisions based solely on qualitative analysis, business owners or managers can
use management accounting information as a decision-making tool. Management
accounting usually provides a quantitative analysis for various decision
opportunities. Business owners can review each opportunity through the prism of
quantitative analysis to assure they have a clear understanding relating to
business decisions.
Increase Financial Returns
Business owners can also use management
accounting to increase their company’s financial returns. Management
accountants can prepare financial forecasts relating to consumer demand,
potential sales or the effects of consumer price changes in the economic
marketplace. Business owners will often use this information to ensure they can
produce enough goods or services to meet consumer demand at current prices.
Companies also pay close attention to the amount of competition in the economic
marketplace. Competition can reduce the company’s financial returns from
business operations.
Importance and Scope
Managerial accounting information
provides data-driven input to these decisions, which can improve
decision-making over the long term. Small business managers can leverage this
powerful tool to help make their business more successful by understanding how
management accounting benefits common business decision contexts.
Relevant Cost Analysis
Managerial accounting information is
used by company management to determine what should be sold and how to sell it.
For example, a small business owner may be unsure where he should focus his
marketing efforts. To evaluate this decision, an accounting manager could
examine the costs that differ between advertising alternatives for each
product, ignoring common costs. This process is known as relevant cost analysis
and is a technique that is taught in basic managerial accounting courses. The
same process can be used to determine whether to add product lines or
discontinue operations.
Activity-based Costing Techniques
Once the company has determined what
products to sell, the business needs to determine to whom they should sell the
products. By using activity-based costing techniques, small business management
can determine the activities required to produce and service a product line.
Embedded in this information is the cost of customers. Deciding which customers
are more or less profitable allows the business owner to focus advertising
toward the consumers who are the most profitable.
Make or Buy Analysis
A primary use of managerial accounting
information is to provide information used in manufacturing. For example, a
small business owner may be considering whether to make or buy a component
needed to manufacture the company's primary product. By completing a make or
buy analysis, she can determine which choice is more profitable. While this
technique is certainly useful, small business owners should only use these
analyses as a factor in the decision. There could be other non-financial
metrics that are important to consider that would not be part of the analysis.
Utilizing the Data
Managerial accounting information
provides a data-driven look at how to grow a small business. Budgeting,
financial statement projections and balanced scorecards are just a few examples
of how managerial accounting information is used to provide information to help
management guide the future of a company. By focusing on this data, managers
can make decisions that aim for continuous improvement and are justifiable
based on intelligent analysis of the company data, as opposed to gut feelings.
Cost Accounting
Cost accounting is an approach to
evaluating the overall costs that are associated with conducting business.
Generally based on standard accounting practices, it is one of the tools that
managers utilize to determine what type and how much expenses is involved with
maintaining the current business model. At the same time, the principles of
cost accounting can also be utilized to project changes to these costs in the
event that specific changes are implemented.
When it comes to measuring how wisely
company resources are being utilized, cost accounting helps to provide the data
relevant to the current situation. By identifying production costs and further
defining the cost of production by three or more successive business cycles, it
is possible to note any trends that indicate a rise in production costs without
any appreciable changes or increase in production of goods and services. By
using this approach, it is possible to identify the reason for the change, and
take steps to contain the situation before bottom line profits are impacted to
a greater degree.
Product development and marketing
strategies are also informed by the use of cost accounting. In terms of product
development, it is possible to determine if a new product can be produced at a
reasonable price, considering the cost of raw materials and the labor and
equipment necessary to produce a finished product. At the same time, marketing
protocols can make use of this type of accounting to project if the product
will sell enough units to make production a viable option.
Cost accounting is helpful in making a
number of business decisions. By weighing the actual costs versus the
anticipated benefit, it can help a company to avoid launching a product with no
real market, prevent the purchase of unnecessary goods and services, or alter
the current operational model in a manner that will decrease efficiency.
Whether utilized to evaluate the status of a department within the company or
as a tool to project the feasibility of opening new locations or closing older
ones, cost accounting can provide important data that may impact the final
decision.
References
https://www.youtube.com/watch?v=AtC20dh02SQ
https://www.youtube.com/watch?v=mq6KNVeTE3A
https://www.youtube.com/watch?v=9XTrTqOBtN0
https://smallbusiness.chron.com/management-accounting-important-decisionmaking-53947.html
https://www.smartcapitalmind.com/what-is-management-accounting.htm
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