Hi, my name is Nancy, and today we are going to start a series of videos on cost accounting. What is the purpose of the accounting system is the topic today.
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Accounting System’s Purpose
An accounting system’s purpose is to capture, record, and organize information related to your business. Depending on the focus of your accounting system can be divided into two types. ( I am going to show you a chart on the screen to help illustrate the next part.) The first is Financial Accounting, and the second is Managerial Accounting. What is the difference between the two systems? The Financial Accounting Systems contains financial statements and disclosures aimed for decision-makers outside of the company. Whereas, the Managerial Accounting provides detailed plans and performance reports aimed at the decision-makers inside the company.
Now, cost accounting contains data required by both types of accounting systems. It is sometimes called Cost Management. Cost Management refers to the approaches and activities that managers use to increase the value given to customers and to achieve organizational goals. It is important to note that cost management is not the same thing as cost reduction.
Accounting System Objectives?
Your accounting system performs a number of functions that help decision-makers make informed decisions. We are going to cover 11 of those objectives.
The fundamental role of an accounting system is to maintain a complete, accurate and permanent record of all transactions of your business when can be retrieved and reviewed at any time.
The financial record is the backbone of any accounting system and without it all other accounting objectives would be compromised. Next, is the planning function.
Decision-makers need to be able to plan how to allocate their limited resources (i.e. cash, labor, materials, machinery and equipment) towards competing needs in the future. This is where budgets come in.
Every accounting system will have a budgeting system integrated into it. Budgets allow organizations to plan ahead by anticipating the needs and resources. In addition, budgeting helps in the coordination of different segments of an organization. Next, is the decision function.
The accounting system helps decision-makers in making a number of business decision and developing policies to make the organizational processes more efficient. Below are a few examples of management decisions that are based on accounting information:
- What should our price for products and services be to achieve the maximum profit?
- Does the business need to acquire financing?
- Should an underperforming product be discontinued?
An accounting system helps determine how well a business is performing by summarizing the financial information into measures. For example, sales revenue, profit, and expenses.
Also, it is important for businesses to have a reliable source of measuring their key performance indicators. Key performance indicators allow a decision-makers to compare themselves against their past performance as well as against competitors.
Financial statements display the financial position of a business. These statements indicate the following examples:
- The profit or loss of a business over a period of time
- The debts of the business otherwise known as liabilities.
- The assets of the business. Examples are cash, inventory, machinery and other assets owned by the business.
One of the major reasons a business fails is mismanagement of cash. Accounting helps decision-makers in determining how much cash and other fluid resources are available to pay for financial commitments. This is essential for working capital management and helps decision-makers reduce the risk of bankruptcy through the timely detection of financial bottlenecks.
Historical financial records are necessary when securing loans or investments. Decision-makers can expect to provide profit and loss statements for the past five years as well as financial projections for the next three years. The Balance Sheet is a great resource for discovering the equity in the business.
Internal controls are necessary in business. An accounting system safeguards a business valuable resource. Business assets such as cash, buildings, and inventory can be lost due to theft, fraud, error, obsolescence, damage and mismanagement. Your accounting system can reduce these risks to an acceptable level by placing checks across the business. An example would be an accounting policy requiring payments above a threshold be approved by a senior member of the management team. Thus, ensuring the accurate and minimal risk of a fraudulent payment.
An accounting system provides a performance basis assessment of a business over a period of time. Furthermore, it promotes accountability across several tiers of your business. For example, shareholders hold the directors responsible for the overall performance of the company based upon the accounting information published in the financial statement.
Accounting is a legal requirement for most businesses. There are laws that require businesses to maintain an accurate financial record of their transactions and report the financial results to shareholders, tax authorities and regulators.
Also accounting helps businesses determine their financial rights and obligations by accurately recording payables, receivables, payments and receipts.
Lastly, accounting is not limited to the information needs of decision-makers, employees, and investors. Each group requires its own information.
In Summary the Purpose of the Accounting System
In summary, the purpose of the cost accounting system is to capture and organize your accounting data. Depending on your needs, there are two types of accounting systems. The Financial Accounting system is used by decision-makers outside your business, whereas in Managerial Accounting System is used by decision-makers internal to your organization.
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