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Business is composed of a set of interrelated system that will ensure the smooth flow of business process and convert capital to revenue efficiently. It is important for a business owner to consider each component as if it is just the existing system inside the process. Thus, utmost importance and consideration must be given to each process component, which includes the accounting process.
That is why we have tax lawyers. That is why we have public accountants. That is why we have financial managers.
It is because of the accounting process.
It is the measurement and the disclosure of essential financial information that will help public accountants, financial managers, tax authorities, investors, and other decision-makers to effectively allocate their financial resources to each business process, thus maximizing the conversion of a business’ working capital to huge revenues. Accounting involves processes in which important financial information of a particular business is recorded, summarized, evaluated, and interpreted. Furthermore, since money is one of the biggest factors that may affect the existence of a business in a certain market, accounting is given utmost attention and consideration at all times.
In accounting alone, there are several aspects that a business owner must consider. There you have the cost accounting, the cash-basis accounting, financial accounting, internal fund accounting, management accounting, project accounting, and others.
And the list continues to expand.
In other words, you might conclude that accounting is a serious and a critical matter that must be handled by a group of people who have the technical expertise in dealing with the accounting as well as financial issues. Realizing this reality, more and more business organizations hand the accounting aspects of their business process to third-party organizations, or most commonly known as accounting outsourcing.
Accounting outsourcing is considered to be one of the more effective management tool, thus many companies often incorporate outsourcing as one of their strategies in business planning. As a matter of fact, the Outsourcing Institute reported that the concept of a CRO (Chief Resource Officer), a professional outsourcing executive manager, is widely-acceptable in larger corporate organizations. However, you need not to be a large corporation to benefit from accounting outsourcing. Even small and medium-sized enterprises can provide better service and produce high-quality products in a more cost-efficient way if they will outsource their non-core business processes, including the accounting aspect. By decreasing the demands on your administrative personnel, you will be able to free them from additional responsibilities and they will be able to support areas directly to your sales, clients, and to the marketing task of your business.
Accounting outsourcing firms can execute your accounting and bookkeeping tasks in all frequencies (monthly, quarterly, and annually) or can supplement your present administrative staff to lessen the responsibility. Here is a summary of the services you can acquire from outsourcing your company’s accounting process:
• Preparing cash disbursement checks;
• Preparing input credits and bank deposits;
• Preparing company payroll;
• Preparing tax deposits and bank reconciliation;
• Preparing financial statements;
• Preparing payroll tax returns; and
• Evaluation and review of financial results on different frequencies.
With accounting outsourcing, you will be able to see the benefits of having a cost-efficient business operation. With your accounting process at the hands of outsourcing professionals, you can focus to the core of your business and convert every cent of your working capital into hundreds to thousands of dollars in generated revenues and profits.
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Walgreen Co. (www.walgreens.com) is a nationwide store chain and has over 3,000 stores and pharmacies and is a retail store phenomenon and has over 27 years of record crumbling sales. Wow what’s the secret Walgreen? Why are you so successful? Well, customers like their high class customer service, their huge selection, and quality products. Some investment and other companies with a financial interest in Walgreen look at the past success of the company and evaluate its financial management.
The companies that are interested will be seen in the Financial Highlights from the company’s annual report. Net sales, total assets, net earnings, and stock holder’s equity are all terms that are used to measure the financial stake of the company. It’s nice that you see the large increase in Wal Green over the years, but what exactly does that mean? What financial knowledge is required of those who manage Wal Green and what methods do they use to measure Wal Green to other large companies? Wal green’s managers most be very skilled in accounting to help maintain the financial stake of the company.
However, Walgreen’ managers are not the only ones that need to be skilled in accounting. The people who have some type of financial stake in the business such as owners, investors, attorneys, employees, and creditors must also be skilled in accounting so they can analyze the financial achievement of the company. Anyone who is interested in any one of theses roles will require some knowledge in accounting knowledge and processes.
That’s what the purpose of accounting is. Contemporary accountants focus on the needs of decisions in accounting information, whether these decisions are internal or external to the business. Accounting can be defined as a systematic information system that measures, process, and produce financial information about an economic matter such as a business or a government organization. Accounting serves as a connection between business activities because it records information.
First, accounting analyzes business activity by recording data for them that they can use in the future. Second, the data is not used until it is needed and retrieved when the time is appropriate. Last, the information is analyzed and communicated through reports to the decision makers. One might assume that the data about business activities are the input and the information for decision makers are the output. A business is an economic entity that sells goods or services to customers at prices that will provide a return to the owners. Here is a list of well branded business that sell goods:
- General Mills Inc. www.generalmills.com sells food products.
- Sony Corp. www.sony.com sells a variety of consumer electronics.
- Hilton Hotels Corp. www.hilton.com sells resorts and hotels services.
- EBay Inc. www.ebay.com offers an online bidding service.
Despite their differences in the products they sell they actually have a lot in common. Each business must have enough money for the cost of doing business but still have adequate money left over. If the cost of business costs more than operating the business, than that’s when a business will start to crumble. The need to earn money to hold an investment capital is known as profitability. However, a business must meet the goal of liquidity. Liquidity refers to having the money available to pay off debts when they are due.
For example, a real estate company must meet the goal of profitability by leasing as many houses as they can, but they also must meet the criteria of liquidity when customers don’t come up with the capital to pay sometimes. Both of these goals must be aced by a company to be successful in their ventures. All businesses try to pursue their goals by engaging in these similar activities.
First, businesses much start some financial activities in order to get enough funds or capital so they can continue their operating. Financial activities include receiving capital from creditors such as banks and other suppliers. On the other hand they also include paying creditors back.
Second, each business must participate in what is known as investing activities. This refers to the productive spending of capital so that it will help a business attain their goals in an orderly manner. Some examples of investing activities include purchasing land, equipment that the business may need, and buying buildings. These resources are then sold or discarded of when they are no longer needed.
Third, another essential of every business is participating in operating activities. Besides selling goods and services to customers, operating activities include hiring managers, workers, and purchasing goods and services, and paying back taxes to the government. An extremely crucial function of accounting is to provide performance measures. This refers to the measures of a business that indicates whether managers are achieving or losing their business goals, which helps to determine if a particular business is under good management. It is crucial for the performance to measure up with the goals of a business.
For a quick example, earned income is a measurement of profitability, and cash flow is the measurement of liquidity, pretty simple right? Since most managers are evaluated by whether certain aimed goals are accomplished, they must have a very sound understanding of accounting. Since managers will try to achieve these goals they must be motivated so that they can perform in the best interest of a business. The typical accounting role of helping decision makers by processing, and communicating information effectively is furthermore divided into the subcategories of financial accounting and management accounting. Financial accounting is used for generating reports and communicating between outside decisions makers to analyze how well the business is performing.
The reports to the outside users are known as the financial statements. Companies who stocks are up for grabs on the New York Stock Exchange send their financial statements to its owners or shareholders, and several of other creditors. The financial statements reflect the goals of profitability and liability, and are used heavily by every person involved with the business. If you have ANY type of business, it is crucial for you to be literate in financial statements. They are the back and bone of accounting. Now, let’s not get some terminology mixed up with each other. It’s critical to distinguish the system of accounting from the ways that information is processed such as bookkeeping, and some type of information management system. It’s only a small part of accounting, but it is a very important method.
The major goals of accounting are to analyze and interpret information. The computer is also an important tool in accounting and is used to retrieve and organize information in great time and accuracy. However, people may assume that the computer does all the work for the accountant, but that couldn’t be more farther from the truth. The truth is, the computer is instructed what to do by the accountant and the main use of computers is to process complicated information. Since computers are so beneficial and widespread many business use computers as a management information system.
This is a system of connected subsystems that provide the necessary information to run a business. The accounting information system is without a doubt the most important subsystem used because it is the key role in analyzing and managing the flow of financial data of a business.
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A company’s financial position indicates the amount of resources that they have, and also the claims against those precious resources at any time. Claims can also be referred as equities. So, a company can be known as a combination of economic resources and equities. Economic Resource = Equities. No mater what type of business your in, every type of company has two different types of equities. They are creditor’s equity and owner’s equity. In another way Economic Resources= Creditors Equities + Owners Equity. When using accounting language, the economic resources a company has at a particular time is called their assets? On the other hand the amount of creditor’s equity a company has is known as their liabilities.
So here is the standard equation of accounting or better known as the accounting equation: Assets = Liabilities + Owner’s Equity. Similar to an algebraic equation, both sides of the equation has to be equal. This equation comes in handy when analyzing the financial effects of your everyday business activities. Let’s talk about a very important concept of any business. Assets are known as the economic resources that a business has that are expected to generate money for them in the future. Some examples are real estate and any other property that a business own so that they can rent out to people. If a business is owed money than it goes into what is known as accounts receivable which are monetary items. However, there are some assets that are not physical. Some examples are copyrights, trademarks, and patents, but they are still extremely valuable to a business.
Next, liabilities are the obligations that a business has such as paying cash, provide future services to individuals, or transferring assets to another entity. These are known as the debt of a business or the money that they have to owe in the near future. All of these are recorded in the accounts payable. As I’m sure you know, having a lot of debt is not fun and liabilities/debt are claims that are seen by the law. The law gives creditor (People that money is owed to) the right to push the sale of a company’s assets if they don’t pay their debt on time. Creditors have a ton of rights over owners and they have to be paid in full even before the owners receive anything. It is very possible for a debt to consume up all a company’s resources. Next, owner’s equity refers to the claim that owners of a business make in regards to the assets they have. It is the residual interest or the remaining assets of a company after deducting the amount of entity liabilities. Here is the equation for owner’s equity. Owner equity=Assets-Liabilities. The owner’s equity within a particular corporation is referred as stockholders equity, so the equation then looks like this. Assets=Liabilities +Stockholder’s Equity.
The stockholders equity has two distinct parts which are the contributed capital and retained earnings. Stockholder’s Equity=Contributed Capital + Retained Earnings. The amount than an individual stockholder puts into a business is known as the contributed capital. Contributed capital is usually divided into two separate parts known as par value and “par value” and “additional paid in capital.” The retained earnings are the amount of equity that is earned by stockholders from the income generating activities of a business that are kept for future uses by a business. Retained earnings are affected by three types of transactions which are revenues, expenses, and dividends.
The increase and decrease in a stock are known as revenues and expenses respectively and these come from operating a business whether online or offline. If you’re online than an operating expense that you will have if you have your own website is your domain name and hosting service. Another example is if a customer agrees to pay you in the near future for a service that the company will perform. The money is recorded in the accounts receivable (asset account) which increase the asset value but decrease the stock holder’s equity amount which is an example of revenue. However, if a company promises to provide a service in the future than this is known as an expense. When this happens the assets decrease (accounts receivable) and the liabilities (accounts payable) is increased, which makes pretty good sense right? When the revenues exceed the expenses this is known as the net income which is good, and on the other hand when expenses are greater than revenues than this is known as net loss which means that you’re losing business or your business costs more to operate than what you make. Dividends are the distribution of assets to stockholders which refer to the past earnings. Do not confuse expenses with dividends, because they both are reducing the retained earnings amount. Retained earnings are the collected net income or revenues minus expenses.
The financial statements are the main way for communicating information about a business to those who have some type of interest in it. What helps me is to think of these statements as a type of model for business because they show how a business is doing in financial terms. However, like a variety of methods and models, financial statements are not perfect and have their flaws. There are four main financial statements, and they are income statement, the statement of retained earnings, the balance sheet, and the statement of cash flows. What the income statement does is summarize the revenues earned or the money made, and the expenses or the money that is deducted from a business. Many accountants consider it the most important financial report because it makes it clear whether a business has met its profitability goal.
The next one is the statement of retained earnings, and it displays the retained earnings over a period of time. The time that the retained earnings will be zero is when a company first started out in their accounting period. A lot of companies use the statement of stockholder equity as a substitute of retained earnings. This is a more detailed statement because it displays not only the aspects of retained earnings but it also shows the changes in the stockholders equity accounts. Next, the financial situation of a business on a particular date, usually on the end of the month or the year is the balance sheet.
The balance sheet displays the value of a business according to their assets and the claims against those assets which are the liabilities and the stockholders equity. Last, the statement of cash flows is geared towards a company’s liquidity measures. They are basically the flow and outflow of cash in a company. The net cash flow is the subtraction between the inflow and outflow of money. The statement of cash flows also display the money generated by simply operating a business, and it also displays the investing and financing transactions that occurs during a particular accounting period.
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The people, who make decisions in accounting, make it based on three categories. First, people who manage a business, second, the external people of a business who have a direct financial interest to a business, and third the people and organizations that have an indirect effect on a business.
This applies to non profit organizations as well. Management refers to the group of people who are in charge for operating a business and for measuring up to the profitability and liquidity goals. If a business is extremely large, then the management will most often require more than one person, and the people are hired to perform their job. Managers need to answer important questions such as what was the company’s net income, and if they have a substantial rate of return.
Does the company have enough assets, and which products bring in the most money? When making a decision, managers usually follow a systematic approach. Even though larger businesses require a more concrete analysis, they follow a similar pattern to small businesses.
Financing a business
Financing for a company is critical, because they need that money to continue their operations. Here is a nice website to find out more information about financing a business. http://www.sba.gov/financing/
Companies invest in their current assets so that it will make money for them in the future.
Producing goods or services
Operations and production management is responsible for developing and producing goods and services that the company can sell.
Learning marketing and advertising skills so that they can distribute goods and services more efficiently.
Human resource management requires the hiring of qualified employees, and also paying them.
The information management retrieves data about the company such as how much they made in the last month, and organize the information in a way so that it can be used. It also releases information to managers, and to important people outside the business.
Another group of individuals that needs knowledge in accounting is those you have a direct interest in the business, go figures. They use the information to analyze how a business is performing. Most businesses generally publish their financial report which shows how well they meet their profitability and liquidity goals. These statements display how well a company did in the past and probably most important, how well they will do in the future.
However, many people outside the business also study the financial reports. They are the investors and the creditors. The investors are the individuals that invest in a business and will keep a part of the ownership. They are concerned with their past success and failures, and also will like to know the potential earnings. A concrete analysis of the financial statement will help prospective investors base their decisions. Once they finish investing they must continue to study a business financial statement.
Next, the creditors are the companies that lease money to businesses for short or long term needs. Creditors are the people that deliver money or provide services for companies in advanced before getting paid. Their main concern is whether a business will have the money to repay the money with interest in an approximate time. Some of the things they study before they make their decisions are a company’s liquidity, cash flow, and profitability. Some examples of creditors are banks, mortgage companies, and insurance companies. Over the years the shift of people who used accounting information has varied drastically.
Now, it is heavily used by governmental agencies, and in matter of fact taxes is the main source of income for government. According to the rules and regulations of federal, state, or even local laws, individuals and companies are required to pay a variety of taxes. These include but are not limited to, sales tax, excise tax, social security tax, federal, state, payroll, and city income taxes. Each tax requires there own rules and regulations which can be very confusing at times. Reporting your taxes is a law and a very meticulous and tedious process.
For example, The Internal Revenue Code contains over a thousand rules for delivering accounting information in federal income taxes. Also, most companies generally have to report to one or more regulating agencies in the United States All corporations must answer to the Securities and Exchange Commission or SEC(To find out more information visit there website at http://www.sec.gov/). This is set up by the government to insure and protect the public by regulating the buying and selling of stocks. Companies that are listed on the Stock exchange must adhere to the rules and regulations.
Some other groups such as labor unions analyze the financial statements of corporations to help negotiate a contact. The income of a company plays a major role in forming these contracts. The individuals who give advice to investors and creditors such as brokers and financial analysts have an indirect financial interest in a business. The amount of inertest in the financial health of corporations has been growing by consumer groups such as customers and the public. They are also concerned about how the corporation will affect the social patterns of the environment and of the people that reside in that area.
The President’s Council of Economic Advisers and the Federal Reserve Board use accounting information to set economic policies and programs. It’s interesting to note that about thirty percent of the businesses in the United States consist of non profit organizations. Some examples of non profit organizations (NPO) include hospitals, and universities.
Some well known non profit organizations include Red Cross, YMCA, Better Business Bureau, and WWF(World Wildlife fund, was formerly in a lawsuit and won against WWE World Wrestling Entertainment, which was originally known as World Wrestling Federation). You may think that the managers of these organizations don’t need to know their accounting skills but they do. They still have a budget and needs to raise money just like any other business. They raise money by collecting it from creditors, donors, and even investors. They also need to have a nice plan and to pay creditors back in an efficient manner, and they also have to follow the tax rules. So even though businesses and non profit organizations have different agendas they both generally follow the same basic rules.
Accounting is a systematic information system that measures, process, and communicate information, I particular financial. When an accountant is making a measurement they must answer four simple questions.
First, what is being measured, second when should a measurement be made, third how much money should be placed on what is being measured, and last how the measurement should be classified. These four questions deal with the basic rules of accounting, and the answers help establish what accounting is and what it is not. Accountants in different fields challenge these questions every day, and therefore the answers are changing often so that’s why it’s a good idea to keep to date with some of the trends.
The first question deals with what is measured. Consider a machine that makes clothes. How many different measurements of this machine can you make? Well, you can measure how much it costs, how many t shirts it can produce, and how quickly it can produce the t shirts. Some of these measurements are extremely important to accounting and some of them are irrelevant. Financial accounting will use money to see how business transactions affect other businesses and corporations.
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To make sure that financial statements are easy to understand, there is a set of rules and practices that is established, which is known as the generally accepted accounting principles (GAAP). This has been developed to provide a basic guideline for the rules of accounting because I think it’s fair to say that it can get confusing at times. There are a lot of variations to the meaning so here is the best answer. It’s the generally accepted accounting rules and procedures that are necessary to define accounting practice.
Basically it’s a set of theories that accountants come to accept, and there are always controversies with some methods between accountants like any other field of study. Accounting is a discipline that is always growing and changing so it’s a good idea to keep up to date with all of the trends that are going on. Since the management prepares the financial statements of a company it is possible that a financial statement can be altered to give a company a particular boost. So, that’s why the companies that sell their ownership to the public needs to get their financial statements audited by a public certified accountant. A certified public accountant (CPA) are licensed through the sate for the same exact reason lawyers and doctors are, so they and protect the public by providing the highest quality of professional service possible.
The reason why CPAs are used is because they have no connection with the company and are independent. They have zero financing ties with the company. Some firms that employ a lot of certified public accountants include Deloitte & Touch http://www.deloitte.com, KPMG http://www.us.kpmg.com/index.asp, and PricewaterhouseCoopers http://www.pwcglobal.com/. An accountant with no strings attached or is independent commonly performs an audit, which is evaluating a companies financial statements, product, accounting systems, and records. The main purpose of an audit is to make sure that the financial statements have been properly prepared according to the excepted accounting rules. Keep in mind; since accounting is not a precise science it has room for interpretation according to the GAPP.
However, that doesn’t mean that the accountants report should contain substantial errors in the financial report, but more like that for the most report it is reliable for creditors to take a look at. An accountant can make a decision only when the financial statements conform to the guidelines of GAAP. In the past creditors, banks, and investors tend to favor an auditor when they are deciding to invest in a company or give loans, because of their independence. The individualistic audit is an extremely crucial factor in the growth of financial markets internationally. Also, many organizations can directly or indirectly influence a GAAP. The Financial Accounting Standards Board (FASB) http://www.fasb.org/ is the most critical body for the development and issuing of rules on accounting practice. The website I previously listed is extremely critical and you can attend seminars online for no cost, and also stay up to date with the rules. This independent body issues the Statements of Financial Accounting Standards.
Next, the American Institute of Certified Public Accountants (AICPA) http://www.aicpa.org/index.htm is the official professional association for certified accountants. It’s the largest CPA organization that exists in America and heavily influence accounting practices through its senior committees. The Securities and Exchange Commission is the agency of the federal government that legally has the power to set and execute accounting practices for companies that sell security to the public, and it has a large impact on accounting practice. Next, the governmental accounting standard (GASB) http://www.gasb.org/ is critical for accounting because its main job is to issue the standards for accounting to the local and state governments in the United States.
However, a lot of these organizations are focused on the rules in regulations in the United States. There are a lot of businesses and accountants internationally so that’s why the International Accounting Standard Board http://www.iasb.org/ (IASB) was formed.
It was approved by more then 25 international agencies. The U.S laws that analyze the revenues for the cost of operating a business can also affect accounting practice. It’s no question that the major provider for income for the government comes from income tax. The income tax rules are heavily applies by the Internal Revenue Service (IRS) http://www.irs.gov/. Sometimes these rules actually cause a conflict with the accepted rules of accounting. A lot of businesses use accounting practices because it’s a requirement by tax law. Also, companies can use the rules of tax law to their advantage financially. Accounting also has laws of conduct for profession, and one extremely important one is ethics.
A nice website dealing with the issues of ethics is http://www.ethics.org/.
It touches bases on questions that help determine if something is either right or wrong, and is based on moral decisions. Most people are faced with several ethical issues each day and, and some ethical activities could be on the range of illegal. If a business decides to use false or misleading advertising, or to bribe customers into giving them testimonials for a specific product, then they could be acting in an unethical manner.
The ethics of a company could also be a result of the employees so that’s why it’s always a good idea to run a background check of who you are hiring, whether it’s online or offline. Professional ethics is the guidelines that apply to the conduct of individuals of a certain profession. Similar to the ethical actions of a company, the ethical actions of an individual is a decision. As being a member of an organization, accountants have to take the responsibility not only to their customers and employers, but also to the general public to act in the greatest ethical way possible.
Accountants are very good at following professional ethics because they are the second professional group as having the largest ethical standards, with clergy being the highest, no surprises about that one. It is important for individuals who decide to become an accountant to have the highest levels of professionalism as possible. To enforce that its prestigious members are following the rules, the AICPA along with each state have adopted some codes of professional conduct that certified public accountants have to follow.
Some simple rules are being responsible to the people that depend on the trust of accountants, such as creditors and investors. When working with people the accountant must act with integrity which means that they are honest, and the individuals gain from the visit with the accountant. The accountant must display objectivity which means that they are intellectually honest, and they must remain independent which means that they must avoid any relationship with the business or individual because it will damage the accountant’s principles.