P1 Examine the purpose of accounting function within an organization

 

Accounting

 

Accounting, which is frequently referred to as simply "accounting," is the process of gathering, analysing, and disseminating financial and other data on companies and businesses. Accounting is the activity of keeping records of a company's financial transactions. Moreover, it can be called as a branch of information science that humans use to collect, organize, and modify financial data. It is a subject that not just businesses but also people, non-profit organizations, and many other entities are familiar with. Journal entries are how the accountants compact the transactions. In bookkeeping, these entries are utilized for keeping track of an organization's financial transactions over a specific time period in order to assess and convey that information to users who are interested in the organization's operating performance and financial status. According to the rules set forth by the auditors and other governing agencies, the accountants create the books of accounts. The accountants may adhere to IFRS (International Financial Reporting Standards) or generally accepted accounting principles (GAAP)(Bennett, Coleman & Co. Ltd, 2023) Accounting also enables companies to analyse their financial performance, including profits, losses, productivity, sales trends, costs, etc. It is useful for assessing financial stability in businesses and other organizations.

 

The following are some of the well-known definitions given for accounting at different times. Accordingly, The American Accounting Association defines accounting as “the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.”

 

According to A. W. Johnson; “Accounting may be defined as the collection, compilation and systematic recording of business transactions in terms of money, the preparation of financial reports, the analysis and interpretation of these reports and the use of these reports for the information and guidance of management”.

 Scope of accounting

All of a company's financial transactions and activities are within the purview of accounting. For the purpose of producing accurate and timely reports, it involves capturing, categorizing, and summarizing financial information. Accounting helps businesses track their performance and make key decisions about their future. Further Many people believe that the accounting field is primarily concerned with the financial dealings of a firm, but this is false. Every sort of corporate entity, including individuals and families, needs accounting. Moreover the field of accounting will continue to broaden and change to meet new opportunities and problems as organizations and technology improve. The areas that fall under the broad accounting definition include (Vendantu, 2022)

 

§  Financial accounting

§  Managerial accounting

§  Cost accounting

§  Tax

§  Auditing

§  Forensic accounting

 

Main purpose of accounting

 

Recording and reporting a company’s financial transactions, financial performance, and cash flows to give stakeholders, including investors, creditors, managers, and governmental authorities, accurate and pertinent financial information. is accounting’s primary objective. Following that, choices regarding how to operate the company, make investments in it, or extend credit to it are made using this information. This data is gathered in accounting records through accounting transactions, which are either recorded through more specialized transactions known as journal entries, or through more standardized business transactions like customer or supplier bills. (Bragg, 2022)and through that accounting provides useful data for managerial decision making and thereby investors can use it to estimate the risk, rewards, and possibilities associated with a business by using the information it gives. Further accounting gives vital details to creditors who are concerned about their claims against the company. And it offers helpful details regarding the management’s capacity to get the most out of scarce resources gives the business information that can help it become more profitable(Tamplin, 2023)

 

Different types of accounting

 

Financial accounting

 

Financial accounting is the process of recording, examining, and summarizing each transaction made by a company or organization in order to evaluate its stability and financial health. The Financial Accounting Standards Board (FASB), a US organization, has established a set of rules that must be adhered to. These have also been referred to as Generally Accepted Accounting Principles (GAAP), and they were developed to make accounting procedures simpler, more reliable, and uniform across all businesses.

 

Types of financial statements are,

 

§  Income statement

§  Balance sheet

§  Cash flow statement

§  Statement of changes in equity

 

Users of financial accounting

 

Numerous users of financial information might benefit from the quantity of information provided by the financial accounts. Different groups of people and corporations use the financial statements the Companies have created in ways that are appropriate for them. Following is a list of the most popular users of financial statements:(Srivastav, 2023)

 

1.      Investors

 

Risk and return in relation to investments are concerns for investors. To determine if they should keep investing in a business, they need facts. Additionally, they must be able to gauge the management’s overall effectiveness and determine whether a company will be able to pay dividends.

 

2.      Lenders and Creditors

 

Information that will help banks and other financial institutions decide whether loans and interest will be paid when due is necessary for those who lend money to bbusinesses.Similarly suppliers and trade creditors want data that enables them to comprehend and evaluate a company’s short-term liquidity. Can the company afford to repay short-term debt when it becomes due?

 

3.      Clients and Debtors

 

Customers and trade debtors need to know whether the company can survive and prosper. They have a long-term interest in the assortment of goods and services offered by the business because they are customers of its products. They might even be reliant on the company for specific goods or services.

 

4.      Employees

 

Employees (and the organizations that represent them, such trade unions) need to know whether the company is stable and profitable going forward. They have a keen interest in learning about potential work opportunities as well as the preservation of pension savings and retirement benefits. They might also be curious in the compensation and perks enjoyed by senior management!

 

5.      Government

 

The interest in accounting data is widespread among governmental departments and organizations. The government, for instance, requires knowledge of firm profitability in order to assess and collect Corporation Tax. Information is required by many regulatory authorities to support judgments about takeovers and grants, for instance.

 

6.      The general public

 

Interest groups, formed by various teams of people with a shared passion for business operations and results, will also need accounting data.

 

Purpose of financial accounting

 

Financial accounting’s main goal is to provide a clear image of a company’s operational success over a specific time period as well as an overview of its assets, liabilities, and equity at a particular point in time. An accountant gathers this data by categorizing financial records and using them to create various financial statements. Accordingly financial accounting serves a variety of objectives and is crucial for making decisions. Businesses wouldn’t be able to continue keeping track of their finances without financial accounting, which would have an impact on how well they could function as well. Hence accounting is an essential component of every business because it discloses the organization’s actual financial situation(Bragg, 2023).

 

Managerial accounting

 

According to the Corporate Finance Institute, managerial accounting is the process of “identification, measurement, analysis, and interpretation of accounting information” that assists business executives in making wise financial decisions and effectively managing their day-to-day activities. In contrast to other areas of accounting, this function is concentrated on internal data collection and reporting, therefore specialists rarely consult or engage with external clients. Instead, managerial accountants concentrate on comprehending the cash flows, financial activities, operating expenses, and internal rate of return of their organization. This accounting data is gathered, examined, and then transformed into reports and presentations that assist in budgeting and future investment decisions.

 

The types of reports it includes are as follows:

 

Budget reports

 

Budget managerial accounting reports are produced for both small enterprises and, departmentally, for large organizations, and are extremely important in assessing business success. Each organization still develops an overall budget to comprehend the big picture of their operations. A budget estimate is developed based on prior experiences, but a great budget always allows for any unanticipated events.

 

Account receivable aging reports

 

Account receivable aging reports are essential if your company extends credit frequently. Managers can detect problems with the company’s collection process and identify defaulters by segmenting the outstanding amounts from your clients into distinct time frames.  Cash flow is essential to the running of any organization, thus if there are a lot of defaulters, the company may need to completely change to stricter credit standards.

 

Cost managerial accounting reports

 

Managerial accounting calculates the expenses of manufactured goods. Costs for labor, overhead, raw materials, and any other costs are all considered. The quantities of the manufactured goods are used to divide the totals. All of this data is summarized in a cost report. This report gives managers the ability to compare item costs to their selling prices. These reports allow you to see all of the expenses that went into the creation or acquisition of the articles, which allows you to estimate and track profit margins.

 

Performance reports

 

At the conclusion of a term, performance reports are made to evaluate the performance of a company as a whole and for each employee. Large organizations also produce departmental performance reports. These performance evaluations help managers make important strategic choices regarding the direction of the company. Performance-related management accounting reports provide such in-depth understanding of a company’s operations that you can use them to identify setup problems. Therefore, the need of performance reports is crucial for any business to maintain an accurate assessment of its approach to achieving its purpose.

 

Other Managerial accounting reports

 

Every firm needs reports on orders, projects, competitive analysis, and a variety of other topics. They are either produced internally or through professional outsourcing. Your ability to manage the reporting requirements of your company will determine the optimal course of action. Everyone’s preferred option will be different, but professional services do have the knowledge and abilities to accomplish this job more effectively. Your managers must have access to reliable and accurate management accounting reports in order to get the most out of their decisions.

 

Users and the purpose of managerial reports

 

Users

 

Managers utilize management reporting and reports as analytical tools to monitor the operation of the company across many divisions and areas. They are used by senior executives and leadership to inform their strategy choices and track the expansion of the company using real-time metrics. They essentially demonstrate the value of your company over a certain time frame by revealing operational and financial data. Reporting to management gives decision-makers information on the organization’s performance, enabling them to choose the best course for boosting operational effectiveness and making wise choices to maintain competitiveness. Many businesses utilize specialized management reporting tools to accomplish this(Calzon, 2023).

 

Purpose

 

Maximizing profit and minimizing losses is the main goal of managerial accounting. It is concerned with how data is presented so that financial discrepancies may be predicted and managers can make critical decisions. Its scope is very broad and it covers many company procedures.

 

Cost accounting

 

Cost accounting is a managerial accounting technique that measures both the fixed and variable costs associated with each stage of production in order to determine the total cost of production for a company. Cost accounting is used by a company’s internal management division to identify both variable and fixed expenses related to the manufacturing process. It will first calculate and report these costs on an individual basis, after which it will compare input costs with output outcomes to help evaluate financial performance and make potential business decisions.

 

Types of cost accounting are as follows:

 

Standard cost accounting

 

Standard costs are the prices that management anticipates to appear during the manufacture of goods. The firm’s prior reports or the administration’s analyses are used to determine these expenses. Standard costs consist of product prices, labor costs, and any overhead expenditures. After establishing the baseline costs, management can move forward with the planning and budgeting findings(Bennett, Coleman & Co. Ltd, 2023).

 

Activity-based accounting

 

 Activity-based costing is a method that identifies and assigns prices to various firm activity, typically factories. These acts result in expenses, which are subsequently attributed to a good or service based on actual usage (Bennett, Coleman & Co. Ltd, 2023).

 

Marginal Cost Accounting

 

A method known as marginal costing treats fixed costs as period costs and solely assigns variable costs to a product. The factory’s fixed expenses, such as its rent and electricity costs, are included as expenses in the financial records and are not specifically attributed to any one product (Bennett, Coleman & Co. Ltd, 2023).

 

Lean Accounting

 

Lean accounting practices benefit businesses that use lean manufacturing strategies because they provide useful numerical feedback. A traditional accounting system considers things that are stored for a year and incur storage costs to be assets (Bennett, Coleman & Co. Ltd, 2023).

 

 

Users and purpose of cost accounting

 

The internal management are the group of stakeholders who use cost accounting to keep track of all variable and constant expenses related to the production cycle. Nevertheless, cost accounting is frequently complicated and time-consuming and therefore modern accounting software automates the process, saving much of the time and money often associated with human cost accounting while giving internal management access to data for budgeting, pricing, and business strategy (Baluch, 2023).

 

Purpose

 

Cost accounting’s main objective is to gather and calculate costs. Costs are accumulated for each cost object and then calculated. Further the cost accounting system assists in determining the selling price and, consequently, profitability, of a cost object. Other than that maintaining spending restraint is one of the fundamental goals of a capable cost accounting system. It also ensures that expenditure follows established rules and that any deviation from these rules is regularly acknowledged and documented. Beyond that the cost accounting system also provides a foundation for price and rate discussions, even as external influences in a competitive market legitimize selling prices (Luther, 2021).

 

Tax

 

A group of accounting techniques known as “tax accounting” are geared toward creating publicly available financial statements that include tax assets and liabilities. The taxable income of a firm is calculated using this tool after taking into account revenue, deductions, and government credits. The guidelines for tax accounting are provided in the Internal Revenue Code. The guidelines that businesses and individuals must adhere to while creating any form of tax document are outlined in this code. Accounting procedures used by a professional to calculate a company’s tax liability may not be the same as those used by the company to assess its assets and liabilities on a balance sheet. There are two different business taxes:

 

·         Direct taxes: A business pays a government its direct taxes. One type of direct tax is the corporate tax.

·         Indirect taxes: Taxes that can be shifted to others are known as indirect taxes. Sales taxes are one form of an indirect tax.

 

Different types of taxes for business entities

 

Every business is required to pay tax on its income, or more specifically, on its net profit. The structure of the business will determine how that tax is paid.

 

·         Income Taxes for Single-Member LLCs and Sole Proprietors

 

The income tax that sole proprietors and members of single-member limited liability companies (LLCs) pay is determined by the business's net income (Murray, 2022).

 

·         Income Taxes for Partners and Owners of Multimember LLCs

 

For informational purposes only, partners in partnerships and multiple-member LLC owners file a partnership company tax return. For their respective portions of the business's profits, the individual partners or LLC members must pay income taxes (Murray, 2022).

 

·         Income Taxes for Corporations

 

As distinct from their owners, corporations are taxed on their income. The corporation submits its annual tax return on IRS Form 1120. Unless the corporation distributes its net income to its shareholders, typically in the form of dividends, it is not subject to tax (Murray, 2022).

 

Users and the purpose of Tax accounting

 

Users

 

·         Employees or Accountants

 

Employing tax accounting specialists helps businesses manage their finances in accordance with industry and financial regulations. Accountants in the following categories may employ tax accounting techniques in their work:

 

1.      CPAs, or certified public accountants:

 CPAs are accounting experts who can handle an organization's accounting, especially tax accounting.

 

2.      Internal auditors

To make sure a firm is in compliance with corporate tax rules, an internal auditor can review the tax filings and payments made by the company.

 

§  Government

 

The amount of money the government generates from its many sources determines in large part how well it can fulfil its obligations as a stakeholder in all enterprises. Taxation is one of these sources. One of the earliest methods of paying for the costs of government is taxation. Additionally, it is one of the tools for maximizing the performance potential of the public sector and the repayment of public debt.

 

Purpose

 

Companies utilize tax accounting to ensure accurate tax computations and the timely preparation of tax papers throughout the filing season. Through the imposition of fees on individuals and business entities, governments are able to support their expenditures and therefore Taxation is primarily used to raise money for the administration's operational expenses which allows the government to monitor a company's finances to make sure it abides by financial regulations (Indeed Editorial Team, 2023).

 

Audit

 

In order to confirm that a process or quality system is operating in accordance with specifications, auditing is defined as an on-site verification activity such as an inspection or examination. A specific function, procedure, or phase in the production process may be the focus of an audit rather than the entire business. Some audits are conducted for specific administrative goals, such as document, risk, or performance audits, or to monitor the status of completed remedial actions. Two categories can be used to categorize auditing (CFI Team, 2023).:

 

Internal Auditing

 

Internal auditing refers to the examination of a company's financial records by accountants employed by that organization. Depending on the goal of the audit, tax, financial, or managerial accountants often perform it. Internal audits probably occur most frequently in the context of financial accounting.

 

External Auditing

 

Accounting professionals that work for a different party audit the company's financial records externally. To make sure that the company's financial statements adhere to the Generally Accepted Accounting Principles (GAAP) standards, financial accountants typically do this task.

 

Types of audit reports

 

The auditor's goal is to offer a proper opinion regarding the financial statements' ability to be free of serious misstatement. In line with this viewpoint, there are four different sorts of audit reports.

1.      Unqualified audit report

2.      Qualified audit report

3.      Adverse audit report

4.      Disclaimer of opinion audit report

 

·         Unqualified audit report

 

A report with an unqualified audit opinion is one in which the auditors state that the financial statements include no serious misstatements. The financial statements in this instance have been prepared using the relevant accounting rules. Unqualified audit reports are the most frequently issued of the four categories of audit reports by auditors (Bory, 2020).

 

·         Qualified audit report

 

The report that auditors provide a qualified opinion on financial statements is known as a qualified audit report. In this instance, there is a major misstatement in the financial statements that is limited to a single section. In other words, the error is significant but not widespread. The overall financial accounts are unaffected. The auditors state that although there is a fault with the financial accounts, it is not a major one in this sort of audit report (Bory, 2020).

 

·         Adverse audit report

 

A negative audit report is one that auditors produce when they discover a major misrepresentation that has an impact on all the financial statements. The misrepresentation in this instance is both substantial and pervasive. In an unfavourable audit report, auditors explain their belief that there is a significant issue with the financial statements, making them unreliable (Bory, 2020).

 

·         Disclaimer of opinion audit report

 

The audit report that contains a disclaimer of opinion prohibits auditors from giving their assessment of the financial accounts. This is typically because auditors were unable to gather enough relevant audit evidence to express an opinion on financial statements. Additionally, there are numerous and significant transactions or balances in this type of audit report for which auditors were unable to get supporting documentation (Bory, 2020).

 

Users and the Purpose of auditing

 

Users

 

The management, directors, shareholders, investors, governments, banks, and many other parties with an interest in the entity consult the audit report given as follows,

 

·         Investors

 

The audit report is often released to cover financial statements for a 12-month or 12-year timeframe. Investors evaluate the entity's financial performance and position for their investment opportunity using audit reports and audited financial statements (Sinra , 2023) .

 

·         Government

 

The government organization evaluates the accuracy and completeness of the tax declaration using audit reports and financial accounts (Sinra, 2023).

 

·         Shareholders

 

The audit report is used by the board of directors and shareholders to evaluate the honesty of the management and the transparency of the financial statements (Sinra, 2023).

 

Purpose

 

The objectives of audits might vary. For instance, a business may ask for an internal audit to better understand its financial status, while a financial contributor from outside the company may ask for an external audit to ensure the company provides data truthfully. Depending on the organization and its needs, audits play a significant role and can accomplish a number of goals. They might help a business get back on track by revealing financial problems or bookkeeping mistakes. An audit is useful for a company when (CFI Team, 2023):

 

·         Keeping up compliance

 

 The assurance that the business complies with statutory industry rules and laws is one of the most crucial justifications for an audit. An audit provides shareholders or a business owner with the assurance that the organization is in compliance with all legislative requirements and won't face hefty fines or a damaged reputation.

 

·         Adding enhancements to the system

 

Audits extensively examine systems and controls; thus auditors frequently recommend helpful changes to increase an organization's efficiency.

 

·         Enhancing planning and budgeting

 

Since an audit verifies the correctness of financial statements by closely examining income, expenses, assets, and liabilities, the data gained can aid in financial planning, decision-making, and budgeting in the future.

 

Forensic accounting

 

Investigating fraud or financial manipulation is what forensic accounting does by doing in-depth research and analysis of financial data. In order to prepare for court cases involving insurance claims, bankruptcies, embezzlement, fraud, skimming, and other types of financial theft, forensic accountants are frequently recruited. Likewise, a forensic accountant is used to look into the flow of money through an organization to assess the routes it takes and identify any illegal transactions, as opposed to traditional accounting, which deals with the assessment of business funds and effectively communicating information to investors and management.

 (CFL Team, 2022).

 

Types of Forensic accounting

 

There are numerous forensic auditing techniques that can be used, and they are often categorized according to the categories of legal procedures they relate to. Some of the most typical examples are provided below:

 

·         Financial theft (customers, employees, or outsiders)

·         Securities fraud

·         Bankruptcy

·         Defaulting on debt

·         Economic damages (various types of lawsuits to recover damages)

·         M&A related lawsuit

 

Users and the purpose of Forensic accounting

 

Users

 

Law enforcement organizations, governmental organizations, independent adjustment companies, insurance companies, banks, and companies of all sizes all employ forensic accounting. While some companies are only focused on offering forensic accounting services, large accounting firms frequently have their own forensic accounting section.

 

Purpose

 

Financial investigations will also become more complicated as firms do, and therefore forensic accountants will frequently be requested to present accounting analyses and findings in a trial or business related problems. Accordingly, a forensic accountant is enlisted to look into how money moves through a company, evaluate the routes they travel, and identify any potential fraudulent transactions. In order, forensic accountants evaluate the possibility of criminal intent and determine if a crime really happened. These offenses may include identity theft, financial

Statement fraud, securities fraud, and employee theft.