Accounting’s Role in an Organization’s Architecture
The role of accounting, which existed under the planned economy, in the social character of the property was conditioned by the needs of the centralized management of the economy, and confined mainly to the identification of deviations from the prescribed patterns of economic behavior of enterprises. The primary users of accounting information were the ministries of particular economic sectors and departments, as well as other government agencies (statistical, planning, etc.).
In a market economy, the accounting is seen as a separate element of the economic system that interacts with partners on business, the budgets of different levels, the owners of capital and the other actors in the process of which they raise financial relationships. In this regard, there is a need for the financial management of the company in order to develop a specific set of principles, methods and techniques of regulation of financial resources to ensure the achievement of tactical and strategic objectives of the organization. The object of control is the financial resources of the enterprise, including their size, the sources of their formation, and relations in the process of formation and use of financial resources of the firm. Management results are shown in the cash flows (magnitude and timing) that occur between now and budget, the owners of capital, business partners and other market agents.
The basis for decision-making in the enterprise is the information of an economic nature. The decision-making process can be divided into three phases: planning and forecasting, operational management, monitoring (financial analysis) of the company. Decisions are made not only for the administration of the organization, but also others – external-economic information users (stakeholders outside the company are in need of information for decision-making in relation to the enterprise). Internal users operate the accounting information outside these financial statements.
Accounting is a system of continuous and interconnected monitoring and control of business operations of the enterprise. Bookkeeping is strictly documented, and no records are made without an accurate registration of the document. Accounting data are used to monitor and control the business activities of the enterprise. Accounting system is rather wide as it can be used in different spheres and for different purposes. It reflects each business transaction that is made in natural, human, and financial terms.
Keeping accounting provides financial information on business operations, carried out by the company. This information is used to decide the most efficient allocation of resources. Accounting records include events that are connected by registration, measurement, and communication.
Information about the company’s profit is determined by comparing the system of accounting of income and expenses of the enterprise. In other types of records, this information cannot be obtained. The role and tasks of accounting are defined in terms of both the state and the enterprise. Accounting, from the point of view of management, is part of the information feedback system, its foundation.
Accounting is designed to provide all levels of management of industrial enterprises, information about the actual state of the object, as well as all existing deviations from the set of planned parameters.
The basis of accounting information allows other management to perform effectively: analysis, planning, control, regulation. Thus, the most important role accounting plays is the information support of production, and in addition, it is a component of the production management system. The significance of its role requires continuous improvement of accounting. At this stage, one of the main problems in the accounting of any organization is the introduction of progressive forms of accounting, based on the use of computer technology.
Accounting plays a major role in the assessment of accounting and determination of its cost (costing). In the current climate of intensification of social production, it is required to improve the economic mechanism, and above all cost-accounting relations, economic incentives, control of production and distribution. In these circumstances, the value of accounting information in management is further increased.
In the modern life, the most notable category is profit; so, the focus of accounting is a professional choice that is being made on the procedures for calculating them. Depending on the chosen methods of forming and changing the amount of taxes, dividends and wages, the profit is being calculated, and the company’s performance measured. With the change in economic conditions, the composition and content of reporting is being changed, which to a large extent becomes comply with International Accounting Standards.
The system of economic information about the financial statements is one of the most notable management tools containing the most synthesized and summarized information. These accounts are used for different purposes at different levels of governance (Weygandt, Kieso, & Kimmel, 2002). The systematic study of financial statements discloses the reasons for successes and shortcomings of the enterprise, helps identify ways to improve the efficiency of its operations.
It is generally recognized that the enterprise accounting should be done according to certain rules. The problem is to establish a set of rules, the implementation of which would provide the maximum effect of abduction accounts. Under the effect, in this case, it seems the timely financial and management information, its reliability, availability and usefulness for a wide range of users. General accounting policies set the basis for the formation (elections and justification) and disclosure (made public) the accounting policies of the organization. Under the accounting policies adopted by the organization, its totality accounting methods of the primary observation, value measurement, the current grouping and summarizing, the outcome of economic activity is understood.
The accounting policies of the organization should ensure completeness for accounting of all factors of economic activity (the requirement of completeness), a timely reflection of economic activity in the accounting and reporting (timeliness requirement).
Financial statements are the basis of an objective assessment of the economic activity of the enterprise, the basis of the current and long-term planning, and an effective tool for decision-making.
Accounting is a system that measures, processes, and transmits information to make decisions. Thus, management and financial accounting is being distinguished in the entire accounting system of the enterprise.
Management accounting covers all types of accounting information, which is measured, processed and transmitted to the internal management to the organization. The main function is the definition of the system. Information management accounts ought to be useful for management and relatively inexpensive; refer to that part of the enterprise, which ones direct, including planning for the future. Financial accounting covers accounting information, which, in addition to its use within the company, communicates to those who are outside the organization, conducted in accordance with the law and established standards. Moreover, it determines everything, except the system, namely depreciation, settlements with other companies, securities, fund, and payroll accounting, and other banking operations.
Financial accounting refers to the entire enterprise
Users of financial accounting are:
- business owners, companies (present and future);
- creditors, which are interested in time, if the company will pay its debts;
- employees of the company in terms of the salary;
- customers concerning the prices of the enterprise;
- public service – the income of the organization;
- publicity regarding a business activity would not come to ecological disaster, pollution of the environment.
On the basis of accounting (financial) statements, decisions about the allocation of investment resources are changing since that is determined by economic policy in the regions, revealed the impact of economic processes on the social position of the individual members of society, etc.
In modern conditions, the company for normal production and business activities should have a common accounting system, which has a strategic orientation. Accounting information, providing the strategic management of the organization is used in three stages: strategic planning, organization, and control. At the stage of strategic planning, the financial analysis is based on accounting data. The strategic management of the organization is in the process of disseminating information on the strategy chosen on the basis of financial statements in a form understandable to all internal users. Furthermore, the development and implementation of tactical steps to implement the strategy of using financial analysis is based on the forecasted financial statements. At the stage of strategic control, cost and strategic budgets estimations are used. In this case, the account information will facilitate the process of developing and implementing the business strategy of the organization, and the tools of accounting will be entered into the process of strategic management. The transition from the administrative cost analysis to strategic cost management is a major challenge for the future. The success of this transition will help boost the value of management accounting. Estimate of the accounting system will be seen in its influence on the implementation of the strategy developed.
In the strategic planning process, the strategy of the organization is determined by the establishment of its mission and objectives, analysis of strategic positions, the study of external and internal environment factors, which may lead to achievement, retention, development and capitalization of competitive advantage (Heidmann, 2008). At this stage, the accounting information is the basis for the financial analysis, which, on one hand, provides information on the financial component of the strategic potential, and on the other, evaluates strategic alternatives. Strategies that are not financially justified or do not lead to an adequate financial return cannot be considered as the successful ones. At this stage, in the analysis of the internal environment of the organization a strategic analysis of costs is conducted. Attention is focused on the procedures for providing a comparison of costs of the firm and its competitors.
It is important to note that every organization during its performance in managed by the high level professional obtaining the position of the CEO. The CEO’s compensation is managed by the executive compensation contract. This contract or agreement is being developed by the accounting department under the strict attention of the compensation committee of directors’ board. Such agreements include the minimum amount of compensation that is required for hiring the qualified person who will execute the CEO responsibilities. Executive compensation contracts often include not only the main salary of the person, but additional package of compensation that is available for him/her. It may involve such incentives: short-term (main salary, bonuses, benefits and penalties), guarantees of the severance agreement, changes of the contact provision, pension regulation and long-term ones (additional bonuses, shares, stock options).
Management structure of the organization refers to an ordered set of specialized functional services and production units, related to the process of justification, development, adoption and implementation of management decisions. Within this framework, the entire management process flows, such as information flows, decision-making, involving the entire staff (Considine, 2010). The structure is needed to ensure that all the processes occurring in the organization are carried out promptly and efficiently.
Accounting service is the most organized part of the information security management decisions. This is the only source of supply as well documented and systematically provided economic information about the actual availability and use of assets and resources of the organization, business processes and performance, debt obligations, payments and claims. Accounting information can implement the following management functions.
The first one is planning. The accounting office is involved in: (a) development of future plans of the organization in the planning of production of new products and entering new markets; (b) determining the pricing policy in order to profit at the lowest cost of production; (c) the establishment of investment, financial policy; (d) drawing up short-term plans and ensuring their relationship to the work of individual responsibility centers (production sites); (e) providing control of reliable information about the financial position of the organization.
The second function is controlling. Accounting service provides information on the progress made on the basis of a comparative analysis of actual and planned performance.
The third one refers to the evaluation. Formed on the basis of accounting data allows financial statements to understand whether the tasks are solved and the intended purpose is achieved. In addition, accounting is the most necessary tool for monitoring the safety of property of the organization, not only indicating deficiencies in the work and its inefficient use of labor, material, technical and financial resources, but also helping to curb these negative effects due to the rational organization of the company’s work.
Accounting is the primary enterprise information system, the data which is used to control the operational processes of the company. Thanks to the accounting, control and analysis all the information necessary for the adoption of new management decisions is prepared. In the current conditions, one of the most significant tasks of any economic subjects is to improve the management process to optimize the use of material, labor and financial resources. Improvement of the forms and methods of management is of paramount importance for management decisions, improving production efficiency, achieving high-yield profitability. This is the main role of accounting that is being performed as the organizational architecture of its performance.
- Considine, B. (2010). Accounting information systems: Understanding business processes. (3rd ed.). Milton, QLD: John Wiley & Sons.
- Heidmann, M. (2008). The role of management accounting systems in strategic sensemaking. Wiesbaden: Deutscher UniversitМѓts-Verlag.
- Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. (2002). Accounting principles. (6th ed.). New York, NY: John Wiley & Sons.