Accounting, in its very basic form at least, is a part of everyone’s life. Even before you established your own business, you must have been acquainted with the ABCs of accounting. In fact, your very first encounter with accounting would have been the three financial statements—the income statement, balance sheet, and cash flow statement—that are mandatory for some businesses.
Accounting is the process of recording, analyzing, summarizing, and reporting financial details in an organized manner. Sounds easy enough, right?
However, when it comes to your business, accounting gets a little more complex. There are many more parties involved, a lot more documentation to be completed, and various types of goals to be achieved using accounting data. Modern-day accounting differs from personal accounting and encompasses specialized disciplines tailored to your business needs. Each discipline has its own systems and tools, serving a specific purpose in a particular type of company or industry, as we will see below.
Why Does a Business Need Accounting?
Apart from filing taxes, accounting is necessary for several business needs, such as:
- Listing and valuation of the assets and liabilities of a business
- Preparing the company budget
- Calculating the profit and loss of the business
- Calculating the return on investments of the business
- Compiling various financial statements and projections
- Helping make informed business decisions based on actual data
The above financial reports not only help the internal managerial team to plan their future strategies with clarity but also help them to approach external parties, including banks, potential investors, tax authorities, suppliers, clients, and others.
Specialized Accounting Disciplines
Providing reliable, data-backed information transparently and logically is the primary purpose of a sound accounting system. However, different types of businesses require distinct accounting approaches that extend beyond simply recording and reporting numbers. For instance, the business goals and accounting requirements of a pharmacy differ significantly from those of a hotel or real estate business. Each requires its own special accounting system and software to record relevant data and generate reports.
Types of Accounting
To fulfill the needs of all such businesses, there are three specialized disciplines within accounting. While some companies may need only one specific system, others may require two or all of them for different tasks. Let’s look at the three disciplines and how they cater to various business types and accounting needs.
Financial Accounting
Financial accounting is a standardized system of accounting that is globally recognized and used to provide an overall picture of a business’s performance. It follows strict rules and adheres to Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).
The primary role of this accounting system is to categorize all business transactions under specific line items and compile key financial statements. The intent is to give a bird’s-eye view of the business’s progress to shareholders, potential investors, associates, and more. Government agencies use this system of accounting. Thus, when dealing with government organizations, including tax authorities, regulators, courts, licensing agencies, and credit agencies, standardized financial documents such as the cash flow statement, balance sheet, and income statement are compiled using this method, as they meet all legal and tax requirements.
Financial accounting emphasizes the importance of compliance and transparency in financial reporting, serving as the benchmark for assessing creditworthiness by lenders, including banks, as well as for calculating taxes and evaluating the overall economic health of a particular business. This is prepared only by a chartered public accountant, and their stamp is essential to validate that the accounts are prepared as per accounting standards.
Managerial Accounting
If financial accounting aims for an overall financial health report, managerial accounting focuses on target-specific, purpose-driven financial analysis and reporting, which can help managers make informed, data-supported decisions.
The managerial accounting system is tailor-made to your business needs. They help businesses measure their goals by monitoring key performance indicators (KPIs). A broadband or TV subscription service uses average revenue per user (ARPU), a software-as-a-service company uses annual recurring revenue (ARR), and an e-commerce company uses gross merchandise volume (GMV). These KPIs are specific to business operations and provide managers in respective departments with a means to measure the success of their decisions. They can accordingly allocate budgets in areas that are performing well and shut down ventures that fail to break even, thereby optimizing the use of resources.
Managerial accounting can help break down financial data into particular categories. For example, the total revenue of your business can be broken down into revenue earned by a specific department, branch, or even product. If a particular product is in high demand and generates a significant portion of the revenue compared to other products, managers can decide whether to increase its production or expand its sales reach to different locations. Thus, by zeroing in on the finer details of the financials, managers and other decision-makers can take concrete steps to boost revenue and profitability.
The customized nature of managerial accounting makes it preferable for creating detailed budgets for specific departments or projects, monitoring key business statistics, and analyzing real-time figures to assess the performance of products or services. It can also be used to compare estimates with actual revenue numbers, giving you the opportunity to rectify or improve your current business strategy.
Managerial accounting software can be customized. You can add or adjust parameters you wish to track on specially designed dashboards through cloud-based and integrated systems that provide real-time data.
Cost Accounting
While managerial and financial accounting focus on a more forward-looking, growth-oriented approach, cost accounting is more inward-looking, with the intent of reducing business costs and utilizing resources to their best potential.
Businesses with price sensitivity and high capital or variable costs, such as manufacturers, the automotive industry, grocery shops, or ridesharing and delivery services, are always looking for ways to reduce costs. Cost accounting provides a detailed breakdown of expenditures, including labour, materials, inventory, overheads, and other relevant expenses, helping pinpoint areas where costs are escalating. Based on the reports, the company can then brainstorm on ways to eliminate hidden costs, increase efficiency, reduce expenditure, and optimize resources.
Such insights can also help highlight any pricing issues; if the manufacturing cost for a product is more expensive than its selling price, it may be an issue that requires major revision and revamp. Accordingly, budgets can be formulated, processes can be improved, and operational costs can be better managed.
Some accounting software features include tracking costs and displaying real-time business spending. It can be a powerful tool to keep costs in check and improve profit margins and operational performance. Small businesses can use cost accounting if costs are eating up profits.
Contact Black and Gill LLP in Etobicoke to Help You with Accounting Needs
Talk to a professional accountant to help you collect necessary information about your business performance or identify cost leaks before they snowball into losses and threaten the business’s financial stability. At Black and Gill LLP, our accountants and bookkeepers offer services such as preparing financial statements in accordance with accounting standards and setting up accounting systems to monitor relevant data. To learn more about how Black and Gill LLP can provide you with the best accounting and bookkeeping expertise, contact us online or call us at 416-477-7681 to learn more about how we can help you and your business.