How is accounting used in business?
Picture: Illustration Accounting business |
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.
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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. (*)