In this article we will focus on and understand the accounting process which enables the accounting system to provide the necessary information to business stakeholders. We will deep dive into each of the steps of accounting and will understand how to identify accounting transactions and the process for recording accounting information and transactions.
In this article, we will focus on and understand the accounting process which enables the accounting system to provide the necessary information to business stakeholders. We will deep dive into each of the steps of accounting and will understand how to identify accounting transactions and the process for recording accounting information and transactions.
A business stakeholder is a person or entity having an interest in the economic performance of the business. These stakeholders normally include the owners, managers, employees, customers, creditors, and the government.
The owners who have invested resources in the business clearly have an interest in how well the business performs. Most owners want to get the most economic value for their investments and they want to maximize the total economic worth of the business. This economic worth includes results of past profits and also reflects prospects for future profits.
The managers are the individuals who have been authorized to operate the business on a day to day basis. They are responsible for various functions of the business as per the agreed roles and responsibilities between them and the owners. Managers are primarily evaluated on the economic performance of the business and therefore they also have an interest in maximizing the economic performance of the business.
The employees provide services to the business in exchange for a paycheck. The employees have an interest in the economic performance of the business because their jobs depend upon it. The better is the economic performance of the business the more security and compensation it offers to the employees.
The customers usually also have an interest in the continued success of a business. For example, if the company fails on economic performance it may not be able to fulfill its promised obligations making the customers suffer.
Like the owners, the creditors invest resources in the business by extending credit, such as a loan or supplying material on credit. They have an interest in how well the business performs because there recovery of credit/investment depends on the capability of the business generating enough cash to pay them back.
Various governments and statutory bodies have an interest in the economic performance of businesses. Central and State governments collect taxes from businesses within their jurisdictions. Statutory bodies levy various taxes that are based on the economic performance of the business. The better a business does, the more taxes these bodies can collect.
The accounting process starts with the identification of its stakeholders. Discussion in the last paragraph will help you understand who could be a stakeholder for your business and identify the correct stakeholders. The next step in the accounting process is to assess the various information needs of those stakeholders and design the accounting system to meet those needs.
The next step is to identify the events and activities that have an economic or monetary impact that is to identify accounting transactions. Every economic activity conducted within a business has a direct or indirect effect on the finances of the company. These economic transactions need to be recorded. The accounting process begins with identifying which transactions to record. For economic activity to be considered a transaction, it must be able to be expressed in monetary terms. Also, transactions must be related to the business – stakeholders' or owners' private expenses are never included with business transactions.
The next step in the accounting process is to record business activity by entering what accounts a transaction affects and how. Recording transactions includes documenting revenues (by invoices or sales receipts), and entering purchases (in the account payable account) and expenditures (in the check register). This step sometimes also involve high-level accounting tasks, such as recording sales orders, tracking prospective customers, and projecting sales opportunities and cash flow.
To record and classify a transaction to appropriate accounts, a proper understanding of the accounting equation is and accounting standards and practices is a must. Calculating and summarizing transactions in a traditional accounting system is a tedious process and automated accounting frees accountants from these repetitive tasks by calculating and summarizing hundreds or thousands of individual transactions and generating reports to satisfy a variety of stakeholders.
Finally, once the accounting system records the economic data about business activities and events, the next logical step is to prepare the business reports and provide them to the stakeholders according to their informational needs. The double-entry system enables accountants to prepare some standard reports like trial balance, profit, and loss account and balance sheet. Accounting reports are based on generally accepted accounting standards and these reports are powerful tools to help the business owner, accountant, banker, or investor analyze the results of their operations.
Stakeholders use accounting reports as a primary source of information on which they base their decisions. They use other information as well. For example, in deciding whether to extend credit to a company, a banker might use economic forecasts to assess the future demand for the company’s products. The banker might inquire about the ability and reputation of the managers of the business.
The purpose of the general ledger is to sort transaction information into meaningful categories and charts of accounts. The general ledger sorts information from the general journal and converts them into account balances and this process converts data into information, necessary to prepare financial statements. This article explains what a general ledger is and some of its major functionalities.
An organizational design is the process by which a company defines and manages elements of structure so that an organization can control the activities necessary to achieve its goals. Good organizational structure and design helps improve communication, increase productivity, and inspire innovation. Organizational structure is the formal system of task and activity relationships to clearly define how people coordinate their actions and use resources to achieve organizational goals.
A subsidiary is a company that is completely or partly owned by another corporation that owns more than half of the subsidiary's stock, and which normally acts as a holding corporation which at least partly or wholly controls the activities and policies of the daughter corporation.
In this article, we explain some commonly used subsidiary ledgers like accounts receivable subsidiary ledger, accounts payable subsidiary ledger or creditors' subsidiary ledger, inventory subsidiary ledger, fixed assets subsidiary ledger, projects subsidiary ledger, work in progress subsidiary ledger, and cash receipts or payments subsidiary ledger.
GL - Understanding Chart of Accounts
A chart of accounts (COA) is a list of the accounts used by a business entity to record and categorize financial transactions. COA has transitioned from the legacy accounts, capturing just the natural account, to modern-day multidimensional COA structures capturing all accounting dimensions pertaining to underlying data enabling a granular level of reporting. Learn more about the role of COA in modern accounting systems.
GL - Unearned / Deferred Revenue
Unearned revenue is a liability to the entity until the revenue is earned. Learn the concept of unearned revenue, also known as deferred revenue. Gain an understanding of business scenarios in which organizations need to park their receipts as unearned. Look at some real-life examples and understand the accounting treatment for unearned revenue. Finally, look at how the concept is treated in the ERPs or automated systems.
Hierarchical Organization Structures
Hierarchical structure is typical for larger businesses and organizations. It relies on having different levels of authority with a chain of command connecting multiple management levels within the organization. The decision-making process is typically formal and flows from the top down.
McKinsey 7S Framework is most often used as an organizational analysis tool to assess and monitor changes in the internal situation of an organization. The model is based on the theory that, for an organization to perform well, seven elements need to be aligned and mutually reinforcing.
After reading this article the learner should be able to understand the meaning of intercompany and different types of intercompany transactions that can occur. Understand why intercompany transactions are addressed when preparing consolidated financial statements, differentiate between upstream and downstream intercompany transactions, and understand the concept of intercompany reconciliations.
General Ledger - Advanced Features
Modern automated general ledger systems provide detailed and powerful support for financial reporting and budgeting and can report against multiple legal entities from the single system. These systems offer many advanced functionalities right from journal capture to advanced reporting. This article will provide an overview of some advanced features available in today's General Ledgers.
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