Understanding the role of accounting -ACCA FBT/F1 Exam
What does the term ‘Accounting’ refer to?
Accounting has a very critical role in every business. Without it, the survival of any business is not possible. Accounting is often called “the language of business.” Why? Because it communicates information to owners, managers, and investor for evaluating company’s financial performance. These people are all stakeholders in the business—they’re interested in its activities because they are impacted by them. The purpose of accounting is to help stakeholders make better business decisions by providing them with ACCURATE financial information.
Without precise and timely financial information, it is obvious that you cannot manage a business or make investment decisions, and the accountant is the one who compiles this data.
More importantly, accountants make sure that stakeholders understand the meaning of financial information, and they work with both individuals and organizations to help them use financial information to deal with business problems. So, we can say that “accounting is the process of measuring and summarizing business activities, interpreting financial information, and communicating the results to management and other decision-makers”
Many people have this misconception that accounting is only about record keeping but it is much more than that. Accounting is required in every field because without the presence of accountants, there will be:
- No Record Keeping
- Budget Formation
- Project Appraisal For Any Investment
- Statutory Reports Which Are legal requirements i.e. financial statements
- Cash Management
- Treasury Management
- Issue Of Shares
- Credit Control
- Payments Management
- Recovery Of Bad Debts
- Product & Service Costing (which also includes overhead allocation which can lead to accurate selling price for any product or service and if there is no accounting your product/service could be overpriced or underpriced)
These are some of the functions of accounting but it is a vast field in itself. It initiates with the transaction firstly recorded in Daybooks or Books of prime entry. These are then analyzed and posted to Ledgers which are ultimately summed up in financial statements.
Accounting cannot segregate their work from another department. An accountant has to deal with the production dept for product costing; the purchase dept for payments to suppliers and with the sales dept for receiving payments from customers, to sum up all the dept have to maintain their terms with the accounting dept. It manages the organization’s financial operations while also providing advice and assistance .Accounts are prepared to align with statutory regulations and to assist management in planning, controlling, and making decisions.
Size of Accounting Department:
An organization’s accounting systems are mainly affected by the nature of its business transactions and the sort of business it is. Here are 3 factors in detail that affect the size the of accounting department in any Organisation:
Size of Organization:
A small company like a grocery store will have a straightforward accounting system, with the till roll most likely serving as the primary accounting record. A large retail operation, like a chain of supermarkets, will have sophisticated accounting systems.
Type of Organization:
Depending on what kind of organization it is, such as profit companies, non-profit groups, and governmental bodies, affects how accounting works inside each type of organization.
An organization can be of any type; it can have an entrepreneurial structure, a divisional structure, a functional structure, or a matrix Structure. Accounting will be different for all. For example, A corporation may be split up into different geographical areas or departments, Each division is autonomous to a certain extent and is in charge of its financial health. Each area has a separate accounting team that is in charge of documenting financial statements for that area.
Users of Financial Statements and Accounting Information:
These are the groups of people who would be interested in financial data about a large public corporation:
- Managers of the company:
- Owners/Shareholders of the company
- Trade contacts:
- Providers of Funds:
- Tax Authorities & Government Agencies
Other users include employees of the company because they need assurance that the company can pay their salaries; Financial analysts and stock who will need the financial information to advise their investors in stocks and shares.
Management vs Financial Accounting
Most accountants specialize in one of two main areas and that main areas are Management Accounting & Financial Accounting.
Management accountants provide information and analysis to decision-makers inside the organization to help them run files Financial accounting provides data to people and organizations both inside and outside the organization to assist in evaluating its financial performance.
In other words, management accounting helps you keep your business running while financial accounting tells you how well you’re running it.
Management accounting, often known as managerial accounting, is crucial in modern-day companies. This area of accounting is concerned with giving internal stakeholders, such as managers and executives, the data they require to make wise decisions for the company. The objective of such reports is to provide timely, accurate, and relevant information in a format that will assist managers in making choices. Reports are according to the needs of specific managers. Accountants collaborate with personnel from all functional areas of the company, including human resources, operations, marketing, and finance, in the preparation, analysis, and communication of this information. Unlike external information, there are no regulations governing the management accounting information. Typically, management accounts may include:
- Cost schedules
Displaying costs that were incurred and classifying them appropriately
A budget is a financial plan for a period, showing expected revenues and costs.
- Variance reports
Variance report shows the difference between the actual cost incurred and the revenue achieved with that of the expected cost and revenues.
In conclusion, Management accountants give businesses the information and analysis they need to succeed in today’s highly competitive and fast-paced marketplace. Management accounting plays a crucial role in ensuring success and sustainability as businesses continue evolving.
It is a critical branch of accounting that focuses on the systematic recording, summarizing, and reporting of an organization’s financial transactions and performance. Financial accounting is responsible for preparing the organization’s financial statements—including the income statement, the statement of owner’s equity, the balance sheet, and the statement of cash flows—that list a business’s past performance and assess its present financial condition. Financial accounting aims to provide transparency and accountability to a company’s stakeholders, including shareholders, creditors, investors, and regulatory authorities which build their trust in the company.
Financial accounting is governed by Principles that are mainly set by different professional bodies such the as International Accounting Standard Board (IASB), Generally Accepted Accounting Principles (USGAAP), etc. Every country can follow its Financial bodies or can follow globally accepted principles of IFRS (International Financial Reporting Standard) which are issued by IASB.
IASB (International Accounting Standard Board):
IASB works to standardize the accounting standards globally. If every country makes such standards then there will a trouble for global investors. So International Accounting Standard Board exists to make globally accepted accounting standards so that different countries can follow the same standards and there will be no boundaries for global investors.
In conclusion, the role of accounting in the world of business and finance is unquestionably important because it is a legal requirement too. Furthermore, accounting now plays a wide range of roles due to increased complexity and globalization such as sustainability reporting, climate change accounting, forensic accounting, and risk management.
Frequently Asked Questions (FAQs):
Q1.What are the consequences if any company fails to comply with statutory regulations of accounting?
Companies can be fined for failing to keep proper accounting records or to not file the financial statements with the government’s company registration body on time.
some of the consequences are:
- Inaccurate or late tax returns can lead to audits and investigations by tax authorities, which can lead to fines and tax penalties
- The directors are guilty of fraud, a crime if the company has released financial statements that are intended to purposefully deceive users. So, they might be subject to jail time or other penalties.
- Directors or managers of companies may be subject to criminal procedures for failing to abide by the accounting regulations.
- Company’s stock market listing may be suspended if the financial statements are not published by the given deadline. As a result, it won’t be able to purchase or sell that company’s shares in the open market.
Q2.What are the common mistakes that people make in accounting?
- The most frequent error in accounting is combining a personal account with a company account because a business is a separate entity from its owners as per the separate entity rule.
- Not making backups and misallocating resources
- Performing manual accounting in this modern era.
- Not Keeping the books up to date.
- Not recording or omitting receipts and payments.
Q3. Which is better cash-based accounting or accrual accounting?
Both are acceptable ways of accounting. Cash-basis accounting is a simpler accounting system as compared to accrual accounting. Cash basis accounting is preferred for businesses that mainly include cash transactions, Whereas accrual accounting is recommended for businesses that are mostly working on credit. some businesses specify that they have to apply accrual accounting if they cross a certain threshold. If to choose which one is better, accrual accounting is the one to choose in the modern-day accounting principle era.
written by Anas Shakeel – student of Mirchawala’s Hub Of Accountancy