Accounting function in informing decision making and meeting stakeholder and societal needs and expectations in SMEs

  

7.0 Accounting function in informing decision making and meeting stakeholder and societal needs and expectations in SMEs

 

v  The accounting function typically generates the following three financial statements on a consistent basis

·         Balance Sheet

The balance sheet is a financial statement that reports a company's assets, liabilities, and equity at a specific point in time. It provides a snapshot of a company's financial position and is often described as a "statement of financial position."

 

·         Income Statement

 The income statement, also known as the profit and loss statement, reports a company's revenue and expenses over a specific period of time. It shows the company's profitability during the period and is often described as a "statement of operations."

 

·         Cash Flow Statement

 The cash flow statement reports the inflows and outflows of cash and cash equivalents for a specific period of time. It shows how changes in balance sheet accounts and income affect a company's cash and cash equivalents and is often described as a "statement of cash flows."

 

Financial accounting is most useful for decision-making in three areas:

1.      Investment decisions

 Financial accounting information is crucial for making investment decisions. Investors need to assess the financial health of the company to determine whether it is worth investing in or not. According to Horngren et al. (2021), "Investors rely on financial accounting information to make informed decisions about whether to buy, hold, or sell shares of stock" (p. 6).

2.      Credit decisions

Financial accounting information also helps creditors make informed credit decisions. Creditors assess the financial position of the company to determine whether it is capable of repaying the loan. According to Warren et al. (2019), "Creditors use financial accounting information to assess the creditworthiness of a business and to decide whether or not to lend money to the business" (p. 10).

 

3.Performance evaluation

 Financial accounting information is used to evaluate the performance of the company. Managers need to know how the company is performing to make informed decisions about future operations. According to Wild et al. (2020), "Financial accounting information is used to evaluate the performance of a company over a period of time and to make informed decisions about future operations" (p. 17).

 

Financial accounting provides users with relevant financial information, such as income, expenses, assets, liabilities, and equity, which helps them make informed decisions about a company's financial performance, position, and cash flow. This information can be used by investors to decide whether to buy, hold or sell a company's shares, creditors to determine creditworthiness, and management to make strategic decisions. Additionally, financial accounting enables regulatory bodies to ensure compliance with accounting standards and regulations, protecting investors and stakeholders.

 

 

 

 

 

 

Taxation functions play a crucial role in helping users make informed decisions. By providing a clear understanding of how taxes work, users can make informed decisions about their finances, investments, and business operations. For example, knowing the tax implications of different investment options can help users choose the best investment strategy to minimize their tax liabilities. Additionally, understanding the tax code can help businesses make decisions about their operations, such as whether to invest in new equipment or hire additional employees. Overall, taxation functions provide valuable information that can help users navigate the complex world of taxes and make more informed decisions. (Investopedia , 2021)

 

The main difference between management accounting and financial accounting.

 

(Graduatetutor.com, 2019)

·         Auditing

 

v  Auditing is a systematic process of examining and verifying financial and operational records, procedures, and systems of an organization. The primary objective of auditing is to ensure the accuracy, completeness, and reliability of financial statements and other relevant information that the organization provides to its stakeholders.

 

Auditors are responsible for reviewing and evaluating the organization's financial statements, internal controls, and compliance with laws and regulations. They use various auditing techniques and procedures to collect and analyze financial and non-financial data, identify potential risks and weaknesses in the organization's processes, and make recommendations to improve the efficiency and effectiveness of operations. The two main specializations for auditors are internal auditing and external auditing.

 

Internal auditing

Internal auditing is the process of assessing an organization's internal controls, risk management processes, and governance procedures to ensure that they are effective and efficient. Internal auditors work within an organization and are responsible for identifying areas where improvements can be made to ensure compliance with regulations and best practices. They also provide recommendations on how to improve processes and reduce the risk of fraud or other types of financial mismanagement.

 

External auditing

External auditing, on the other hand, is the process of reviewing an organization's financial statements and records to provide an independent opinion on their accuracy and completeness. External auditors work for independent audit firms and are engaged by clients to provide an objective assessment of their financial statements. Their primary objective is to express an opinion on whether the financial statements are free from material misstatement in accordance with accounting standards.

Both internal and external auditors play important roles in ensuring that organizations are compliant with regulations, operating effectively and efficiently, and providing accurate and reliable financial information.

 

·         Cost accounting

Cost accounting is a branch of accounting that focuses on analyzing, recording, and tracking the costs associated with producing goods or services. It involves identifying and classifying expenses, determining the cost of production, and providing information to management for decision-making purposes.

·         Forensic accounting

Forensic accounting is a specialized field that combines accounting, auditing, and investigative skills to investigate financial fraud and white-collar crime. Forensic accountants analyze financial data, identify discrepancies, and present evidence in a manner that is admissible in court. They also provide expert testimony in legal proceedings.

·         Fund accounting

Fund accounting is an accounting system used by non-profit organizations, government agencies, and other entities to track and manage financial transactions related to specific funds or grants. Each fund is treated as a separate accounting entity, allowing for better transparency and accountability of funds.

·         Project accounting

Project accounting is the process of tracking and managing the financial performance of individual projects within an organization. It involves recording project expenses and revenues, allocating costs to specific projects, and generating financial reports to evaluate project profitability and inform decision-making.

·         Fiduciary accounting

Fiduciary accounting is a specialized form of accounting that deals with the management of assets held in trust by a trustee for the benefit of a beneficiary. It involves tracking the financial transactions, investments, and distributions of the trust assets, as well as ensuring compliance with legal and ethical responsibilities.

·         Political campaign accounting

Political campaign accounting refers to the process of managing and reporting financial transactions related to political campaigns. It involves keeping accurate records of donations, expenditures, and other financial activities to ensure compliance with campaign finance laws and regulations. Effective campaign accounting is essential for maintaining transparency and accountability in political fundraising and spending.

·         Government accounting

Government accounting refers to the process of recording, analyzing, and reporting financial transactions and activities in the public sector. It involves the use of specialized accounting standards, rules, and procedures to ensure accountability, transparency, and efficiency in the management of public funds and resources.

·         International accounting

International accounting refers to the set of accounting principles, practices, and standards that are applied to financial reporting in a global context. It involves the preparation and presentation of financial information in accordance with international accounting standards, as well as the analysis and interpretation of financial statements from a global perspective. International accounting is essential for multinational corporations, investors, and regulators to understand and compare financial information across different countries and regions.

 

 

 

 

 

 

v  The treasury function within an organization typically involves managing the company's financial assets and liabilities, as well as its liquidity and financial risk. The main objective of the treasury function is to ensure that the company has sufficient funds available to meet its financial obligations and to maximize the returns on its investments.

v  The treasury function can provide stakeholders with valuable information and insights that can help them make better decisions.

 

1.      Investment decisions

 The treasury function can provide information about the company's investment portfolio, including its returns and risks. This can help stakeholders make informed decisions about where to invest their money.

2.      Risk management

The treasury function can help stakeholders understand the financial risks that the company is exposed to, and provide information about how these risks are being managed. This can help stakeholders make decisions about how to mitigate or avoid these risks.

3.      Capital structure decisions

 The treasury function can provide information about the company's capital structure, including its debt and equity levels. This can help stakeholders make decisions about how to fund the company's operations and growth.

4.      Financial forecasting

The treasury function can provide financial forecasts and projections, which can help stakeholders understand the company's expected financial performance in the future. This can help stakeholders make decisions about investments, resource allocation, and other important matters.

The treasury debt is responsible for the timely availability of those funds when needed for the support of the business. (Ethan Hathaway, n.d) All the accounting function are recorded in financial statement.so by analyzing the financial statement in SMEs mainly 3 regular bases as mentioned above, the stakeholders can make decision.

                               (ResearchGate, n.d.)