The Role of Accounting
Accounting plays an integral part in assisting an organization to achieve its goals. In addition, accounting is an important aspect in the development of economics.
Developing economies are finding that transparency in organization is critical to attracting external investors and growth.
Transparency is achieved through accounting/control processes that provide assurances to outside stakeholders that the organization is operating appropriately.
- Accounting traditionally identifies events affecting the organization.
- It also measures and communicates those effects in monetary term.
For example, the purchase of a building by the organization is measured by the cash outlay for the building. A sale on credit is identified as a receivable for the organization and measured in terms of the money owed to the organization.
Since all the events are measured in a common monetary unit, such as the US dollar, the Euro, or the Pound Sterling, accounting systems aggregate the effect of different events and make comparisons.
Accounting reports communicate accumulated accounting data to organizational managers and to external users such as shareholders and government regulators.
The role of management accounting Opens in new window in today’s organization goes well beyond recording the monetary amounts of past events. The ability to satisfy user needs, especially through the provision of forward-looking information, is necessary.
To fulfill this role, specifically the information demands of managers and external users, management accountants must ensure that the accounting system encompasses non-financial information such as
- production data,
- consumer demand forecasts,
- customer satisfaction statistics,
- service calls, and
- industry benchmarks.
By integrating financial and non-financial data, the accounting system can provide more comprehensive information to better serve its users.
Different parties use accounting information related to the organization.
Management accounting involves the use of accounting information by managers to help achieve the organization’s goals.
Managers receive this information in the form of reports such as
- sales reports,
- inventory reports,
- budgets, and
- monthly operating reports.
Management accounting provides information for two general functions: making planning decisions and control.
Accounting allows for better planning decisions through more knowledge of the problem.
Managers use accounting for control through influencing members of the organization to make decisions that are consistent with the organizational goals.
Characteristics of Management Accounting
Preferred characteristics of management accounting include:
- accurate measures of multiple inputs and outputs of the organization,
- timeliness, identification of responsibility, and
- the capacity to be forward-looking.
The accounting system must also meet the requirements of constituents outside the organization.
Financial accounting is used to report to investors, creditors, and other interested parties outside the organization.
These parties are primarily interested in information for making investment and credit decisions. Preferred characteristics of financial accounting include:
- verifiability,
- measures of organizational value,
- measures of organizational risk, and
- consistency with financial reporting regulations, known as generally accepted accounting principles (GAAP) Opens in new window.
Globalization Opens in new window has motivated the harmonization of accounting standards Opens in new window through the adoption of International Financial Reporting Standards (IFRS) Opens in new window by many countries including those of the European Union, China, Japan, Canada, Brazil, and Australia.
Tax accounting is used to calculate income taxes and report to government taxing authorities, such as the US Internal Revenue Service (IRS) Opens in new window, the UK HM Revenue & Customs (HMRC) Opens in new window, and Canada’s Revenue Agency (CRA) Opens in new window.
Taxing authorities prefer accounting to be verifiable and to measure past income consistent with tax regulations.
Use of Accounting for Making Planning Decisions
Planning decisions are made to help an organization achieve its goals.
Increased knowledge about the impact of a decision on the organization allows managers to make more informed choices. For example, the forecast of sales Opens in new window is used to determine the amount of product to be manufactured.
If a customer survey is performed, a more accurate sales forecast will lead to better production decisions.
Management accounting is not the only source of information to improve decision making. Information about customer tastes, and the political, legal, and competitive environment also leads to better decisions within an organization.
The advantage of management accounting information is the conversion of events into a common unit of measure, the monetary unit.
Conversion of events into monetary amounts allows managers to compare the impact of various decisions on the organization.
The decision to adopt advanced manufacturing technologies or to continue manual operations can be analyzed by converting both events into monetary outlays and comparing the monetary outlays of each alternative.
Non-financial information is also useful, such as the impact of different alternatives on the welfare of employees. New manufacturing methods may improve or harm employee welfare, especially if adoption leads to the need for fewer workers overall.
Use of Accounting for Control Decision
Management accounting assists in control by helping align the interests of the members of the organization with the goals of the organization.
The members of the organization are motivated to achieve set goals through a reward system. Rewards are based on achieving sufficiently high performance measures.
Some performance measures are based on accounting numbers. For example, managers of divisions are commonly evaluated based on the accounting profits of the division.
Non-accounting performance measures and direct observation (monitoring) of members also are used to evaluate and reward the members of the organization.
Management accounting reports often include non-accounting measures of performance such as customer satisfaction, cycle time, and product defect rates.
Management accounting also helps to assign responsibilities to control members of the organization.
Limits on actions by managers are frequently based on accounting numbers. For example, a salesperson may have the right to grant credit to a customer up to a limit of $1,000.
The communication of these responsibilities often occurs through management accounting documents such as the budget Opens in new window.