Accounting information is a critical part of every business decision. Without accounting information, you’ll miss important opportunities that could have led to a better outcome.
The main concept behind accounting is that it allows managers to see how your company is doing financially and to make changes that may be needed to make it better.
Accounting information is a form of financial reporting. We talk about this in the “financial reporting” section of this book.
Accounting information is an essential part of business, but it’s most often found in the form of financial statements. A financial statement is a series of numbers that report your financial results in a simple and understandable way. You may have heard about financial statements in the news and seen them on TV. They are also one of the main kinds of documents used to make payroll and get paychecks.
Accounting information is a special case of financial reporting. If you are a manager of an organization, you need to know the financial reporting you are required to give to the other managers. These are usually called accounts receivable and accounts payable.
As a manager, you are required to file a separate financial report for each employee. This report tells the employees what they owe, how much they paid, and how much they made over the last year. This report is basically your accounting statement. Because this is the report that is filed for the year end, it also gives the manager a clear picture of where his current budget is going to go in the next year, and how much he needs to pay his employees.
The problem with accounting reports is that they don’t tell you much about your business. It is not uncommon for managers to give their employees a set amount of money to start working, but the manager is likely to ask for more money to be paid later. But the report doesn’t tell you why they chose that amount or even that they asked for more money. It might be the manager’s understanding that a certain amount was given to the employee, but no one else knows that.
This makes sense. Generally, managers are the ones providing the money to the employees. So if they ask them to do something, they are likely to ask them to do it well, not asking for more money than they already earned. But why should managers give their employees more money then the employees already earn? One reason could be that they have no idea how to earn more money. Another reason could be that they believe that the employees are lazy and would just work for the money.
It could be that managers are aware that employees are lazy, but they don’t want to give them more money at the expense of their own profits.
Managerial Accounting is the process of calculating and recording the profits and/or losses of an organization. This is the way managers can determine what the financial health of an organization is (and not just, for example, whether they are broke, etc).