Friday, June 5, 2009

How is accounting used in business?

It might seem obvious, but in managing a business, it's important to understand how the business makes a profit. A company needs a good business model and a good profit model. A business sells products or services and earns a certain amount of margin on each unit sold. The number of units sold is the sales volume during the reporting period. The business subtracts the amount of fixed expenses for the period, which gives them the operating profit before interest and income tax.

It's important not to confuse profit with cash flow. Profit equals sales revenue minus expenses. A business manager shouldn't assume that sales revenue equals cash inflow and that expenses equal cash outflows. In recording sales revenue, cash or another asset is increased. The asset accounts receivable is increased in recording revenue for sales made on credit. Many expenses are recorded by decreasing an asset other than cash. For example, cost of goods sold is recorded with a decrease to the inventory asset and depreciation expense is recorded with a decrease to the book value of fixed assets. Also, some expenses are recorded with an increase in the accounts payable liability or an increase in the accrued expenses payable liability.

Remember that some budgeting is better than none. Budgeting provides important advantages, like understanding the profit dynamics and the financial structure of the business. It also helps for planning for changes in the upcoming reporting period. Budgeting forces a business manager to focus on the factors that need to be improved to increase profit. A well-designed management profit and loss report provides the essential framework for budgeting profit. It's always a good idea to look ahead to the coming year. If nothing else, at least plug the numbers in your profit report for sales volume, sales prices, product costs and other expense and see how your projected profit looks for the coming year.

10 comments:

Unknown said...

Hi,

Thanks for the informative post.
Cash Flow - Cash is vital for every business. The relationship is similar to that of the car and the fuel - the car won’t run unless there is fuel. The same thing is true with business and if you don’t have enough cash to run the business, eventually you will need to close. There are many ways to obtain the needed cash of the business like private funds, banks, relatives, friends, venture capital, etc.

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Amanda said...

I strongly agree with you that some budgets better than none. With the budgets we can decrease the cost and raise the margin to some extent.

Phyllis Stoffel said...

Income or profit is determined when you have already deducted what you have payed for the business and maintenance, and that of which you acquire in the business. Accounting has a big say on this. Much like software like sage accounting and sage accpac, which makes auditing easier and faster.

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SuNiL bhave said...

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Unknown said...
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Unknown said...

Accounting is very important for business..accounting allows companies to create financial reports that can be compared with other companies..
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Unknown said...

Accounting can be described as a way to communicate the financial health of a business or an organization to any and all interested parties. It is a way of assessing the assets, liabilities and cash flow, or the future of an entity for all current and future investors. It is the lifeblood of a business and all types of business have basic information that is recorded to get that job done.

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