Accounting is the language of business. Accounting is used in just about every department, group, team and meeting within a company. Production, administrative, marketing, sales and every other department is answerable to the accounting department. The objective of any business is to make money. Since the accounting and finance professionals are in charge of tracking and managing the money, they have the ultimate say in who is performing and who is not.
Accounting information is used to prepare financial statements. Financial statements report on a company's position for a specific time period. They show the company’s ability to cover their long- and short-term debt, their profit or losses and their ability to meet their monthly cash needs. The financial statements pull data directly from the general ledger accounts. The most common statements are the income statement, balance sheet, cash flow statements and the statement of retained earnings.
Accounting information is used to determine the company’s going concern position. The going concern is the company’s position related to its ability to continue meaningful operations into the future. If it is foreseen that a company cannot continue operations for longer than a couple of months then the company has a going concern problem. This is determined by reviewing the financial statements. Ratio analysis is conducted to determine the company's financial position.
Ratio analysis is the evaluation of the company's liquidity, solvency and level of debt. The company’s liquidity determines its ability to pay its short-term debt. Its solvency determines its ability to pay its long-term debts. Other ratios determine if the company is turning over its inventory fast enough and if it is collecting receivables in a timely manner. All of these issues are important in determining the success of its operations.
Budgeting is a critical function in all businesses. Operating a company without a budget is like steering a submarine without sonar and a depth finder. The accounting data provides critical figures in creating a future budget. Revenue, expenses, profit and retained earnings are looked at when creating a budget. Budgets look at past revenues and year-after-year growth or decline. Budgets are built around these figures. Pro forma statements are created to help predict the results of future operations.
Cost accounting is the process of evaluating operations through the use of variance analysis. This is a comparison of budgeted versus actual costs of operations.
Managers use cost accounting to support decision making to cut a company's costs and improve profitability. This process is used to streamline operations and decrease man hours, raw material consumption and machine hours. Cost accounting has been used for several hundred years.