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It is a fact that accounting exists everywhere starting from home to multinational corporations. Accounting is concerned with collecting, recording, analyzing and communicating financial information (Laureate Online Education, 2008, p. 6). Let us take a simple example o f a boutique shop in a village. Even in three / four generations' back we have heard of credit sales business by these shops even though the jargon "credit sales" does not exist. The boutique owner usually maintains a logbook for daily sales and at the end of the month customers settle the amount. Maintaining the revenues earned from the business and the expenses spent can be seen as a basic transaction for any business.
There are arguments saying the double entry accounting system exist five thousand years ago and the Assyrian, Chaldaean-Babylonian and Sumerian civilizations were known for recording transactions (Alexander, 2002). However, Littleton, (n.d., cited in Alexander, 2002) argues the seven key ingredients of accounting private property, capital, commerce, credit, writing, money and arithmetic were the basis of double entry book keeping which was created by Italians in 1494.
The need of accounting is not based on the sector, size, country or the objective of the organization. Accounting is an important function to plan and run the business from which expected returns can be gained. The basic accounting function of identifying and recording information exists in all businesses regardless of size, country, etcâ€¦ However, the diversification of business at international level has expanded the span of accounting. For instance, boutique shop owner will not be aware of exchange gain or losses that are not needed for his business operations but for MNCs it is a must to analyze the currency fluctuations.
For any business the three financial statements income statement, balance sheet, and cash flow statement are important to manage the business effectively. In brief, resources are utilized in a business to achieve the objective of the business. The objective of a business differs based on the purpose of initiations. Say a privately owned company's purpose would be maximizing profit whereas the purpose of a charity organization would be to serving the public. Whatever reason for existence, resources are utilized which has to be managed efficiently to bring the best outcome. Unless recording and analysis takes place in a proper manner, there will be no room to manage it efficiently. The accounting system again can vary based on the size of the business starting from manual book keeping to ERP software.
Accounting information should be relevant, reliable, comparable and understandable (Laureate Online Education, 2008, p. 10) and the main concern is that accounting information should be tailor-made to suite each user in satisfying his/her own purpose.
Accounting can be broadly divided in to management accounting and financial accounting. Financial accounting satisfies the statutory reporting purpose and the external users such as lenders, suppliers, tax authorities, etcâ€¦ Controls are the most important part of the business for which both financial and management accounting information is the key. Management accounting enables the internal users to make strategic decisions in growing the business and achieving the objective of it.
Normally management accounting information is being produced by comparing the actual against budget and the last year results. This will enable to put in controls if the budgeted expenses are exceeded. Likewise analyzing the forecasted cash flow of the business would enable to predict the surplus / deficit and decide on whether to invest or to get additional finance to run the business. In running a business, it is important to control the cost and maximize the revenue. Annual budgeting function is playing a major role in making the divisional managers to achieve the sales targets without exceeding the expense budget. Accounting information has to be prepared according to the accounting standards.
In considering not-for-profit organizations need of accounting, they too are involved in receipt of revenue as a form of donations and expenses related to the charity works and the running expenses of the organization. Therefore, planning on the charity work would need proper records of financial information despite of purpose of existence.
As a result of globalization the way of accounting has also been grown significantly. For instance, in businesses which deal with multi-currencies are having the need to consider exchange fluctuation and risk management. Furthermore, due to international business expansions the need for consolidation accounts has arisen.
The global business in one hand has allowed room for growth and in the other hand; it has increased the risk of business, which in turn increased the disclosure requirements and tight statutory and accounting compliance. Only way to keep the business on track is through reliable accounting systems. Another element of accounting information is that it should not be outdated for which the need for ERP system arises. Manual calculations will lead to time consumption where the ERP will allow each user to customize his/her needs and run reports in a timely manner.
Recent financial crisis is a good example to prove the importance of accounting. In addition, it has clearly shown the importance of not only recording the accounting information but also properly interpreting it (Scorte, 2009).
In summarizing the above, I would strongly recommend that accounting is the heart of business and I would suggest investing in proper ERP system will able the business growth through proper strategic decisions. All the managers and decision makers should understand the basic finance regardless of of their field to successfully run their own division and thereby the organization at large.