Importance of Accounting

The importance of financial accounting practices is well known and majority of businesses have well established processes to record, summarize and analyze the historical and prospective information. Financial data is not only required to fulfill legal & tax reporting obligations but it also provides an overview of operational performance through management reporting, that helps to make informed business decisions.

But many Professionals and Small Businesses do not maintain detailed accounting data, as this requires additional efforts to record financial activities. And accounting of Personal/Home finances is rarely practiced in a formal and effective way, although everyone regularly perform many transactions.

Benefits of Financial Accounting

Everyone has a general understanding of their key financial information like cash/bank balances, investments, loans, income, general expenses, etc. Spreadsheets or simple applications are often used to maintain such data, but these solutions provide only a partial view of the actual financial information.

For instance, when an asset is purchased, it’s full value can not be considered as expense immediately. It’s depreciation value should be calculated based on the life span and posted on a monthly basis. So it’d be difficult to know the current value of an asset, without a proper accounting practice.

Access to such key information can be very beneficial when making strategic decisions. Following are some additional benefits of practising accounting:

• Accountability: Operational decisions can be made accountable or measurable on agreed parameters by having key transactions recorded up to a detail as required for analysis.
• Record keeping: Accounting entries are maintained for transactions with original records as a supporting document. As there can be lot of data being transacted with different service providers and consumers, accounting practice helps in aggregating such information into a central place.
• Performance Analysis: Financial reports provide an insight into overall information about the entity like assets, liabilities, profit/loss, cashflow, etc. and Management reports are designed to analyze operational performance. In addition, analytical accounts can be used to monitor profitability from multiple dimensions or perspectives.
• Planning / Forecasting: Analyzing historical data provides an opportunity to plan for future activities and improve by learning from past experience. Defining a budget for the year and monitoring the actual performance by comparing it with budgeted value, allows greater control on operations with a proactive approach.
• Prevention of misuse: Accounting practices have evolved over the years to prevent common misuses by cross verification processes to make sure transactions are properly made. For ex. reconciliation of payments with payable entries, ensures that amount can not be paid more than the payable or paid more than once!

Issues in adopting accounting practices

Some common reasons for not maintaining detailed accounting records are:

• Requires additional time and cost: Initial configuration, training and defining standard procedures to be used for most of the use cases, requires more time and resources. Subsequently recording transactions on a regular basis is also required. But if properly analyzed, benefits of implementing this process outweighs the initial effort/cost involved.
• Focus on Revenue/Operations: Some assume that, it is sufficient to manage the revenue / operations properly and accounting is required only for tax reporting and compliance. A summarized set of data is processed on a monthly or yearly basis by external accountants for reporting purposes only. But this doesn’t provide insights into performance or efficiency of the overall business, as data are not available for detailed analysis.
• Big learning curve: Many are not familiar with accounting principles, terminology and book keeping practices, as these are not part of the education system for other streams than Commerce. So due to lack of accounting knowledge there is a big learning curve.
• No suitable system available: Using a comprehensive accounting system is complicated as they are mostly designed for advanced users. There are some simplified applications available to track cash transactions and expenses but they do not always conform to basic accounting principles (like double entry, accrual based accounting) or do not provide certain required features (like asset management, multi-currency, consolidation, …)

Accounting Information Systems

Applying a formal accounting practice, with many transactions, is made easier only with a good financial accounting system. As business operations continue to expand and grow, there is a greater need for system solutions to record those activities and for standardization of processes. This enables to focus more on core operations by providing the required information in a summarized or graphical way and also with details if necessary. With the growing technology adoption in market place, providing access to customer’s own data and related services, is also becoming a necessity.

There are many Accounting Software available with lot of useful accounting functions. Free and open source software also provide very advanced features that are present in proprietary software. A comparison of common accounting features provided by them, is available here.

But for Professionals and Small Business users, there are very few affordable systems providing all necessary features. Functions required to run small operations are also similar to that of a large business, except for the scale of transactions. But many available solutions designed for this segment, provide only a subset of a complete package and thereby limiting what can be accessible by users, for ex. multi-currency support, fixed asset management, analytical accounting, financial consolidation, etc.

So there is a need for a good accounting system providing such features designed for professionals and small business users. Here in this blog, I’ll continue to explore and document in detail such concepts and functions.

Standard Operating Procedures

Standard Operating Procedure(SOP) is a procedure specific to each operation that describes, in a simple and step-by-step manner, necessary activities to perform tasks in compliance to defined standards. For ex. the process of billing and collection of accounts receivables or the process of closing a fiscal period by performing all necessary verifications, etc.

In addition to using an accounting system, it is very important to define SOPs to ensure required quality of operations and avoid any known pitfalls. For an effective implementation, accounting systems also need to provide features to define SOPs, which could even be a simple document management system built within the application.

So in this blog while documenting accounting features, I’ll also explore and define standard practices for common tasks based on my understanding from personal accounting perspective.

Summary

Maintaining a formal accounting practice is very important not only for businesses but also for individual professionals. Although there are some issues in implementing such a process, benefits of this process outweighs the effort or cost involved.

A good accounting system is necessary to record and analyze financial transactions. It is also important to standardize processes, by defining SOPs to streamline all regular activities. In this blog, I’ll document features of an accounting solution, based on my experience in building and using such a system.

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