Join Eddie Davila for an in-depth discussion in this video Defining accounting, part of Business Foundations.
- Money. It's the lifeblood of the organization. It needs to flow. Money comes in from customers. Money must also go out to employees and suppliers. What happens if the flow stops? No revenues from customers, the company dies. If we stop paying people, no supplies, no employees, the company dies. So, whose responsibility is it to keep track of the money flow? Finance? No.
Finance does deal with money, but their job is not to keep track of money flows. Their job is to obtain funds and also to invest them. Keeping track of the money flow is the job of accounting. They're responsible for tracking money coming in from customers, money going out to employees and suppliers, and they're also responsible for keeping track of money flowing inside the organization from one department to another. Why is this important, and who benefits from this tracking of the money? For that, let's discuss the two types of accounting.
Managerial accounting and financial accounting. Managerial accounting keeps track of where all the money goes. This is important to people inside the company. This helps with budgeting. It helps us keep track of departments that are using money wisely, and it also tells us where there might be waste. Managerial accounts are the ones that tell us how much it costs to make and deliver a $2,000.00 television to the consumer. So, managerial accountants help managers inside the organization measure costs of production, marketing, and everything else that goes on inside the company.
They also assist in developing budgets for next year, as well as budgets for new projects. After the fact, they can then report if people are staying within those budgets. Plus, managerial accountants find ways to help us minimize taxes. So, what do the folks in financial accounting do? Instead of being responsible for reporting to folks inside the company, financial accountants are tasked with developing reports for people outside of the organization.
Why is this important? It informs people about our company's financial status. That's important for anyone considering investing in the company, and for organizations that might consider lending money to us. Plus, government agencies, special interest groups, employee unions, law enforcement, and sometimes even customers are interested in knowing about the financial activities as well as the financial stability of the organization.
While financial reports are generated by financial accountants throughout the year, they work hard to develop the all-important annual report. The annual report provides financial data, a written recap of events from the past year, and a statement of concerns and opportunities for the company in the future. This information in the annual report will influence all sorts of actions and behaviors inside and outside the company. So financial accounts must carefully consider every word and every number in developing an annual report that abides by the laws of commerce, and does not mislead parties inside or outside of the organization.
As you can see, having accountants, both managerial and financial accountants, helps the company learn from its past, understand its present financial health, and also plan for its future growth. You may not love accounting, but hopefully now you understand just how important they are for any organization that requires money to survive.
He also reviews the basics of the people side of business: managing employees and developing customer relationships. Last, he covers the financial and information management aspects of business and provides a basic explanation of economics, so that you can understand the relationship of your business to the bigger picture.
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- Understanding business goals, stakeholders, and resources
- Developing a product or service
- Selling a product or service
- Raising capital
- Managing employees
- Managing customer data
- Understanding finances
- Managing resources
- Understanding economics