The Fundamental Importance of Accounting

September 2020 — By David Berry

Accounting is often thought of as a commoditized practice, accountants stereotyped as ‘one size fits all.’  In truth, the range of outcomes is vast, and businesses are well-served not to overlook the fundamental importance of accounting.  As many business managers and owners know, accounting can be the source of tremendous headaches.  But it can also be a source of relative peace, and a contributing factor to a business foundation built for success.  Quality accounting should yield the following three outcomes:

  1. Transactions are Recorded Accurately and in a Consistent Manner - It may seem rudimentary, but achieving accuracy and consistency over time is not an easy or accidental feat.  Doing so requires process design that considers the full life cycle of a transaction and is repeatable in nature.  Technology should be leveraged to increase automation, where cost effective. Shortcuts or insufficiencies in process design will generally lead to inconsistency, and ultimately error.  Detective procedures such as performing bank reconciliations and reviewing financial statements can be helpful in identifying accounting errors.
  2. Assets & Liabilities are Managed Appropriately - Businesses give rise to a wide array of assets and liabilities. These includes Working Capital, Fixed Assets and Long-term Debt. Proper management of these assets and liabilities is an important piece of maximizing a company’s financial success. Accounts Receivable should be reviewed on a regular basis to identify past-due balances, and ensure that on-going business is done only with customers of acceptable credit risk. Accounts Payable management includes not only ensuring vendors are paid on time, but doing so in a manner that optimizes cash flow. Fixed Assetmanagement can be an important part of minimizing a business’ tax liability.  For these reasons, appropriate asset and liability management is a critical outcome of quality accounting.
  3. Financial Statements are Reviewable in a Comprehensive and Efficient Manner - For many businesses, accounting system based financial statements constitute the sole source of financial reporting. Thus, the importance of these statements is considerable.  Financial statements should be informativeand intuitive both in summary and detail.  In summary, a reader should able to efficiently understand the business’ overall profitability, cash flow and financial position.  At a detailed level, managers need to know what,when and with whom transactions have taken place. Financial statements are ultimately crafted through a company’s chart of accounts.  In designing a chart of accounts, one should consider both the ability to segment and aggregate transactions, by nature and by activity-driver.  The fields and functions inherent in the accounting system should be effectively utilized to enable a diverse and streamlined chart of accounts.

In summary, though the goal of accounting may be simplistic, the proper design and execution of accounting procedures is not.  It requires experience and expertise.

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