OES Consultancy

Ask people to describe accounting and the most common answer you’ll get is that accounting involves a lot of record keeping and bookkeeping. Which is true. The accounting system of a business is designed to capture and record all its transactions, operations, activities, and other developments that have financial consequences. An accounting system generates many documents, forms, and reports. Even a small business has hundreds of accounts, which are needed to keep track of its sales and expenses, its assets and liabilities, and of course its cash flows. Accounting systems today are computer-based. The accounts of a business are kept on the hard disks of computers, which should be backed up frequently, of course. The primary purpose of an accounting system is to accumulate a complete, accurate, and up-to-date base of data and information needed to perform essential functions for a business. This presents a broad overview of the internal and external functions of business accounting. Note the Janus, or two-faced, nature of an accounting system that looks in two different directions—internal and external, or inside and outside the business. In addition to facilitating day-to-day operating activities, the accounting department of a business has the responsibility of preparing two different kinds of internal reports—very detailed reports for management control and much more condensed reports for decision making. Likewise, the accounting department prepares two different kinds of external reports— financial reports for owners and lenders and tax returns for tax authorities. Accountants have a relatively free hand in designing control and decision-making reports for managers. In sharp contrast, external reporting is compliance-driven. External financial reports must comply with authoritative standards and established accounting rules. And, as I’m sure you know, tax returns must comply with tax laws. In addition to the day-to-day operational demands (preparing payroll checks, paying bills on time, sending out invoices to customers, etc.), there are two other internal functions of accounting: the preparation of management control reports and reports for management decision making. Management control demands attention to a very large number of details; quite literally, thousands of things can go wrong. Management decision making, in contrast, focuses attention on relatively few key factors. Decision making looks at the forest, not the trees. For decision-making purposes, managers need accounting reports that are condensed and global in nature—that present the big picture. These reports should resonate with the business model and should be structured according to the profit and cash flow models of the business. In passing, I should mention that accounting information seldom comprises the whole set of information needed for decision making and control. Managers use many, many other sources of information—competitors’ sales prices, delivery problems with suppliers, employee morale, and so on. Nonaccounting data comes from a wide diversity of sources, including shopping the competition, sales force reports, market research studies, personnel department records, and so on. For example, customer files are very important, and they usually include both accounting data (past sales history) and nonaccounting data (sales reps assigned to each customer).

Latest Blog Posts