Financial AccountingThe Role of Accounting in an Organization

The Role of Accounting in an Organization

role of accounting
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Accounting provides an accepted, common way of classifying and reporting financial information. Accounting systems standardize the way that organizations report their financial results to shareholders, creditors, governments, and society in general.

The primary purpose of developing this business management tool is to support decision-making, based on actual facts and figures. In any organization, accounting is an important function. It’s a combination of both internal control mechanisms and tools through various sub-functions and reporting infrastructure that involves reporting to management, regulator, and other stakeholders.

Accounting Functions in organization

Accounting is a process of recording financial transactions to determine and maintain the value of assets, liabilities, equity, income, and expenses in an entity.

Accounting within organizations helps to perform various day-to-day tasks and functions such as making sales and purchases, issuing invoices, maintaining inventory records, tracking assets and liabilities, managing expenses, paying salaries by issuing paychecks, managing taxes, etc

The sub-functions of accounting within an organization include;

Financial Reporting Function:

This function of accounting allows users to monitor the financial status, performance, and results of the organization. The financial Reporting function prepares reports regarding the financial status of an organization for use by external parties such as investors, creditors, or tax authorities. It provides the basis for decision-making by investors and creditors.

It includes the preparation of all financial statements including the income statement (profit & loss statement), the balance sheet, and cash flow statements. It is concerned with the reporting of financial results to owners and creditors of the company.

Taxation Function:

This function helps in calculating taxes on the profits earned by an organization as per the tax laws in that country. The taxation function also aids in filing annual tax returns to the government. This function involves keeping records on income taxes payable by the organization to the relevant tax authorities throughout the year. The records are maintained from when revenues are earned until taxes are paid at the end of each fiscal period (year). The complexity involved in this function increases when international transactions take place which may have implications for taxation in multiple jurisdictions.

Treasury Function:

It is concerned with managing cash flow. It ensures that necessary funds are available when needed by the company. This function is concerned with the cash flow management and risk management of an organization. It includes activities like investing surplus funds, borrowing funds, managing inter-company deposits and advances, and monitoring interest rates among others.

Budgeting and Costing Functions:

It is concerned with planning activities in advance. Budgeting includes preparing budget estimates for future periods as well as measuring costs against actuals incurred in previous periods.

Accounts Payable Function:

It is responsible for ensuring that all bills incurred (including against goods, services, and payroll) by the organization are paid on time by drafting checks against available resources.

Accounts Receivable Function:

It is concerned with monitoring the creditworthiness of customers and ensuring that payments are made on time for services rendered or goods supplied to customers. It also coordinates collection efforts if the customer does not pay on time.

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Common types of Accounting Reports

In accounting, reports are a set of information created to present complex data in an organized, systematic way. Accounting reports are presented to decision-makers so that it’s easier for them to make decisions in the future. Reports inform users about any activities or events in a business organization.

Financial Statements

Financial statements are the heart of any accounting system. They communicate financial information to a variety of audiences, including financial statement users such as investors, creditors, and management, as well as regulatory agencies and tax authorities. Financial statements are also used by external users for making business decisions.

Balance sheet

The balance sheet also called the statement of Financial Position (SoFP) is a financial statement that lists a company’s assets, liabilities, and owners’ equity at a specific point in time. The balance sheet is prepared once a quarter or twice a year to show the financial position of the company.

Profit and Loss Statement

A business’s income statement is a financial document that shows revenue and expenses for a particular period of time. An income statement gives a summary of the profit or loss for a business over a given period. This is expressed as gross revenue minus expenses equal net profit or net loss by subtracting expenses from revenue.

Statement of Cash flows

A cash flow statement is a report that shows the amount of cash generated and spent for a particular period of time. It also reflects how much cash flow your business has had through the period and how much it has accumulated. It shall not be mixed with profit and loss accounts as the Cash flow statement does not include noncash transactions such as depreciation etc. on another hand it takes account of any cash flow resulting due decrease/ increase in assets, liability, or if any cash injected or taken out by business owners.

Various other Management Reports

Budgetary Variance Reports

Variance Report is a document that demonstrates the difference between budgeted amounts and actual results that are achieved. Variances are produced for each budget line item and also for entire budget components – revenue and expenses. For example, if the total revenue was expected to be $100 but was only $90, there will be a variance of $10. In this example, it is difficult to know if the variance was because of lower sales or higher expenses. A combination of variances may throw light on this matter.

Variance Report is also called Budget Variances or Budgetary Variances.

Aging Reports

The purpose of an aging report is to determine how much time has elapsed since the invoice was issued, and thus it can be used as a basis for planning purposes. It also helps in identifying any open invoices not yet been paid and helps in placing priority on which customers/ suppliers need follow-up calls or other remedial action. These reports are usually divided into the amounts which have been overdue since 01 months, 03 months, 06 months, and more than a year

Aging reports are prepared for both receivables and payables. The components of an aging report include:

– A listing of accounts receivable/ payables

– A listing of open invoices

– The total amount due from each customer/ to each supplier

– An analysis of how long each account has been outstanding

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