How to Setup an Accounting Department
No business can function for long without an accounting department. Whether you are a self-employed person working out of your home or a giant organization with operations in multiple countries, you will need an efficient system of accounts to handle all your financial business matters. This article will walk you through the various functions performed by the accounting department, and how to set up and manage an effective accounting system.
This article will walk you through the various functions performed by the accounting department, and how to set up and manage an effective accounting system. In this article we will look at 1) an introduction, 2) functions of the accounting department, 3) importance of the accounting department, 4) setting up an accounting department, and 5) considerations while setting up an accounting department.
WHAT IS AN ACCOUNTING DEPARTMENT?
An accounting department is a department within a company that handles the financial aspects of the business. This department keeps updated records of money paid, received, owed and borrowed. Basically, the accounting department manages the economic front of the business. Accounting has been called the “language of business”. Seeing as the main aim of most businesses is to make profits, the accounting department is an intrinsic part of any organization. It is very important to ensure that your accounts system is efficiently run and managed.
Accounting is a generally overlooked sector of business. Most people underestimate the importance of the accounting department as accounts operations are mostly run behind-the-scenes as opposed to departments like Marketing, Purchasing and HRM which deal with front-line business activities. However, a good manager knows the value of an efficient accounting system to the business.
PURPOSE OF THE ACCOUNTING DEPARTMENT
Any business corporation needs to pay salaries to employees, record cash inflows and outflows, keep track of orders, deliveries and purchases, assess the value of company assets and liabilities and calculate company profits. All these and many other functions are performed by accountants in the accounting department to ensure the business is running smooth financially.
What functions do accountants perform?
Accountants provide many varied financial services to the company. Among their list of functions is recording accounts payable and receivable, payroll, procurement and inventory, property accounts and all other financial elements.
- Payroll. An important function of the accounting department is calculating the wages and salaries, called gross wages or gross earnings, payable to the employees. The department is tasked to make sure that all employees receive a fair pay, including bonuses, commissions, and benefits. They monitor and update workers’ off days, vacations and sick leave. The accounting department has access to information contained in personnel files. Based on this information, they have to calculate the amount of income tax, social security tax, union fees and other cuts from gross earnings to arrive at the wages payable to each employee. Taxes payable to the state and federal government by the company have to be calculated and updated. Furthermore, the accounting department reimburses employees for business expenses. In short, payroll is a very essential and complex part of business management.
- Cash inflows. This is all the cash earned from sales, payments received from debtors and other sources. All cash sources have to be identified and entered into accounting books, where they are balanced against company expenses. The accounting department keeps detailed records of all incoming revenues. Accountants have to make sure all cash inflows are accurately recorded into the correct checking accounts of the business. They have to track any owed amounts payable to the business, including outstanding invoices. They must make sure that customers pay those invoices on time. At the end of the term, accountants balance the checkbook to arrive at the annual company profit or loss.
- Cash outflows. In addition to payroll, the business incurs many different kinds of expenses over the year. Purchase and delivery costs, paying taxes, buying new assets such as machinery or land, repairs or updates to existing assets, repayment of loans—a company is always writing checks for one purpose or another. The accounting department prepares all these checks and forwards them to the intended person(s) for signatures. It keeps up-to-date records of all payments cleared and all payments outstanding. In order to run smoothly, the business must have a good relationship with vendors and suppliers. The business needs to make sure to clear all its payments on time; otherwise its reputation may suffer. The accounting department looks out for different ways to cut costs, such as discounts offered by some vendors upon fast payment. It should also make sure that the company is not charged for late payment of dues.
- Inventory. An inventory is a list of items that the company holds for the ultimate purpose of resale. These items are usually sold within a year. Inventory can include raw materials, semi-finished products, and finished goods. The accounting department is responsible for keeping accurate inventory records and to ensure that the cost of raw materials and overheads does not negatively affect company cashflow. Accountants have to decide on balanced inventory levels for the company; that is, not so high that they add to costs and not so low that customers are left dissatisfied.
- Fixed assets and property accounting. Every company needs to have some long-term assets such as land, buildings, tools and equipment, machinery, vehicles, etc., in order to function effectively. These are called fixed assets or tangible assets—items that cannot easily be converted to cash. They may be retained by the business permanently or over long periods. The business needs to maintain detailed records of all its fixed assets, keeping track of the depreciation they undergo over time. This is both for calculating tax payable to authorities and for controlling the use of the assets. The accounting department is responsible for making these accounts. They are recorded into the balance sheet that is used to compute total company assets, liabilities, and capital at any given period. It is very important that the company’s financial statements are kept up-to-date by the accounting department. A business always needs to buy the most upgraded equipment to remain competitive in the market, and its financial statements like the profit and loss account and the balance sheet show its overall worth and value and how much it can afford to buy.
The accounting department may be assigned other related work as well, but this is a comprehensive list of their major functions. The significance of these functions in running the business should be obvious. No business can operate without paying its employees accurately and on time, or without keeping detailed records of its asset and liabilities, of cash received and paid out. Quite literally, a company would be unable to run efficiently if its accounting department did not perform these functions effectively and on time. It is very important that the accounting department maintains a good bookkeeping system and keeps it detailed and regularly updated.
IMPORTANCE OF THE ACCOUNTING DEPARTMENT TO THE COMPANY
The accounting department is very important in ensuring how the company operates financially. Without an accounting system, the business cannot run its operations effectively—since all business deals require either cash received or cash paid out, and the accounting department maintains these records. In other words, this department helps to keep a business afloat financially. Having an efficient, committed accounting department can help the company on many levels.
The accounting department helps the company cut its costs without significantly affecting its running operations. By preparing the financial statements and keeping track of incurring company costs, the accounting department has the know how of how the company can alter its operations in small ways that can lead to reduced costs. It advises the other departments in strategies they can adopt that will lead to increased profitability and shareholder wealth.
The accounting department provides financial data to the higher managers who will use this data to make important business decisions and to control how the company assets and resources are being used. Accountants calculate in detail how much cost the business is incurring, such as the cost of labor, the return from sales versus marketing, distribution, and advertising costs. The accounting department identifies which business operations are most cost-effective so they can be maintained and which are least cost-effective so they can be modified. It also advises on the feasibility of proposed business ventures such as expansion, mergers, and takeovers.
Influencing financial decisions
The accounting department prepares detailed financial records that are used by various outside parties such as shareholders, stockholders, state and federal governments, debtors, creditors etc., to make important decisions. The creditors can use these records to assess whether it is feasible lending large amounts to the company, potential shareholders, and stockholders use them to make investing decisions. The government agencies use them to determine the amount of income tax and company tax payable. The information prepared by the accounting department can help the business when looking to obtain investments and credit.
The accounting department reviews past financial decisions and makes a recommended budget—keeping the company’s objectives and mangers’ decisions under consideration—and advises on strategies that can be used to increase business efficiency. Once the strategies are put into effect, the accounting department monitors them to assess the changes they bring to the running of the company.
Essentially, the accounting department helps to run the overall operations of the business. Their function is more like that of advisors to management than that of a separate department within the company. They monitor the overall performance of the company, and their recommendations can bring long-term changes in its operations and policy.
SETTING UP AN ACCOUNTING DEPARTMENT
A company’s bookkeeping system is very crucial in determining its overall success. Therefore, a lot of care and consideration should go into setting up an accounting department. Every business is faced with the dilemma of deciding on an appropriate accounting system to suit its needs. Some companies may choose to operate a manual accounting system but in the modern world, this is not very feasible even for small-scale businesses. To retain an edge in the highly competitive market today, all businesses need to keep with the rapidly upgrading technology and for this it has become essential to have a computerized accounting system. This is also more time- and cost-effective as it is easier to record entries into an automated system rather than manually keeping records.
When setting up an accounting department, a company usually has to go through the following steps:
Select an accounting method
The company first has to decide which accounting method it will be using. There are two choices available.
- Cash-basis accounting. In this system, companies record income when cash is received and record expenses when the company pays them. Cash-basis accounting is reliable when you want to track the actual amount of money entering and leaving your company. This is a common accounting method among small businesses that tend to make immediate payment for goods and services received.
- Accrual accounting. In this system, the company records income whenever a sale is made, regardless of whether they receive payment for it, and records expenses whenever the good or service is received, regardless of whether the company pays for it. Accrual accounting is useful in informing the company how much expenses it is incurring each month and how much profit it is generating. This method is used by large businesses or even by smaller business that tend to buy and sell goods or services on credit.
The company can pick any of the above accounting methods to use, as long as annual sales are less than $5 million (in which case, it will use cash accounting) or it maintains an inventory (in which case, it must use accrual method).
Select a method for recording transactions
After you have selected an accounting method, you have to decide the method to record transactions into accounts. There are two choices available to businesses.
- Manual recording. Accountants hand-write transactions into a ledger. Nowadays very few businesses use this method as it is very difficult and time-consuming to enter a large number of transactions daily in a ledger. Also, there is also a danger of incorrect amounts being entered, which can lead to problems for the company.
- Automated recording. Transactions are recorded electronically in a software program. This has the advantage of accuracy. It is easier to keep track of any discrepancy or inconsistency in the accounts if transactions are being fed into a computer. It also helps to perform more monotonous and routine tasks quickly and efficiently.
Set up a chart of accounts
Next the company has to set up a chart of accounts, which lists all the different accounts in your accounting system, like income accounts, expense accounts, capital accounts, etc. Hiring motivated and competent accountants can help take this task with ease.
Maintaining the selecting accounting system
After deciding on the accounting method, the company has to learn and maintain the selected accounting system. Setting up an accounting system costs time and money, and so the company should utilize it to the fullest, that is, it should enter every transaction, bill, charge, and refund. Another way of maintaining the accounting system is to reconcile it with transactions in the business bank statement. This is an effective way of properly allocating and accounting for company funds.
CONSIDERATIONS WHILE SETTING UP ACCOUNTING DEPARTMENT
Maintaining an effective accounts system is a tough job. Accountants usually have multiple function to perform and can get stressed out with the work pressure. The company can take certain steps to ensure that the accounting department works efficiently and the accountants are not burdened with excessive workloads. Here are some important factors to take note of when setting up an accounting department.
Conduct Process Walk-Through
It is imperative that all employees are made familiar with the working of the department, its objectives and functions. This will ensure that the employees are comfortable and accepting of a new department. Moreover, those that are hired to run the accounting department should be allowed to meet stakeholders to gather understanding of the structural framework and potential loopholes as far as the finances are concerned.
Use Best Practices
Implementing accounting best practices can improve the efficiency of the accounting department, boost employee morale and improve data quality.
Take Advantage of Unused System Functionality
If you intend to get a software installed, make sure its utility is worth the money that you are paying. Oftentimes companies buy expensive software and do not make use of most of its features because they are useless for them. Instead get your software customized if need be to get the maximum utility.
Conduct Process Training
Successful companies regularly assess the need to train their employees. Providing training is a failsafe method of improving productivity levels and workplace efficiency. Workers may receive on-the-job training, they may be sent elsewhere to professional development classes.
Develop System Super Users
The accounting department might also be used to create training plans by collecting data via queries, reports, etc.
Establish Process Metrics
Developing metrics is quite simple and it will be very beneficial if it is learnt. This will help monitor the performance of the company and enable everyone to access and assess their own performance and the company activity individually as well as in comparison to another company or during the same period in a previous year.
Nothing will improve employees’ morale more than knowing that their efforts and hard work are being acknowledged. Providing monetary and non-monetary rewards can help motivate staff and they will be happy to perform even the monotonous tasks that the accounting department requires.
Essentially, the accounting department helps to run the overall operations of the business. Their function is more like that of advisors to management than that of a separate department within the company. They monitor the overall performance of the company and their recommendations can bring long-term changes in its operations and policy.
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