Every company knows that in order to have a successful and thriving business, you need a professional accounting department to keep your finances in order. The smallest oversight can cost your company not only valuable time, but money, too.
In this post, we’ll look at the essential qualities an accounting department must have in order to keep your company in good financial health. Also, we’ll break down the various components of an accounting department and how they operate in relation to one another. Let’s examine the different facets of monthly accounting services in more detail to better understand its function.
What Are Accounting Services?
An accounting services department is responsible for recording all financial transactions of a business, as well as maintaining those records to track all expenditures. The accounting department will vary in size, depending upon the size of the company. The larger the company, the more robust the accounting department must be in order to properly track the business’s expenses and transactions.
There are several subsets of accounting: financial accounting, managerial accounting, cost accounting, and tax accounting.
Financial accounting is the area responsible for handling the records of all financial transactions during an accounting period, such as balance sheets and income statements.
Managerial accounting is linked to financial accounting in many ways, but there are differences. For instance, in managerial accounting, an accountant will compile quarterly and monthly reports that are given to the business’s managers regarding the company’s operations. Those managers will then review the reports and make decisions regarding the company’s operations. Managerial accounting is also vital to budgeting and financial analysis.
Cost accounting specializes in a company’s pricing of their products and services based on the costs it takes to produce them. Whereas financial accounting is concerned about the company’s financial performance overall, cost accounting focuses primarily on factors of production.
Finally, there is tax accounting, which is responsible for maintaining records for the purposes of filing federal, state, and local taxes. The tax accountant oversees all tax related finances and record keeping, in order to ensure all liability is kept to a minimum.
As you can see, without a strong accounting department, a company could quickly lose control over its expenses and debts, which would be catastrophic for its financial well-being.
An important aspect of accounting is time. If outstanding invoices are not paid and/or collected in a timely manner, it can be detrimental to a company. The accounting period is a timeframe in which all the various functions of an accounting department must be completed. Normally this will be measured by a calendar year or fiscal year.
A calendar year is simply the year starting in January, while a fiscal year is set at random and establishes the time period for all accounting related matters. These time-frames are crucial in maintaining accurate records, paying debts owed, and collecting on the company’s outstanding assets.
The Importance Of Accounts Payable
Accounts payable, AP for short, is the area in an accounting department that handles a company’s financial obligations that have not yet been paid. This can include outstanding bills from creditors, vendors, and suppliers.
An AP balance normally appears on a business’s balance sheet under the current liabilities section. Keeping a thorough record of a company’s AP balance is vital for a financially healthy company, as the increase of the balance means that a company’s purchasing is relying too much on credit, rather than cash. This could lead to heavy debt and financial instability, as well as loss of vendors and other ancillary services. Conversely, when AP decreases, this means the company is paying on its outstanding debts and obligations.
To delve a little deeper, let’s break down how this area of accounting functions in regards to its recording of finances.
When an invoice is received, the accountant will credit the entry to accounts payable, which then goes to either an expense account, or an asset account for larger capitalized expenses, such as property or plant assets.
An important concept in understanding AP is the double-entry system. A double-entry system means that transactions are broken down into debits and credits. Essentially, a debit in one account offsets a credit in another. For instance, a debit in an assets account may increase, while the credit in an equities account will decrease. This helps to ensure that the debits and credits are equal in order to maintain a balance on the books.
Say a company receives an invoice for $1,000 for office equipment and supplies, the AP department will record it as a $1,000 credit and a $1,000 debit to office equipment expenses. This will go to the income statement so the transaction is recorded, despite the cash not being paid out. That is to say, the expense is recognized when it is incurred, not when cash is paid out.
This is all crucial to ensuring that not only is the company paying its financial obligations, but also maintaining strong, professional business relationships with its vendors and clients. Without a strong and diligent accounting department, the company could lose vital ties with its vendors, lenders, suppliers, and other outside services. The role of AP is also important to ensuring that employees are paid in a timely manner during pay periods.
The Importance of Accounts Receivable
Accounts receivable, AR for short, is the exact opposite of AP. It is the money owed to a company by its customers and clients for goods and/or services it has used. Once a company renders services or products, an invoice is given to the customer, and this invoice is documented by AR so the company knows the amount of money a client owes and when it is due.
These are all recorded by a company as assets, since it is an obligation by the client to pay; they are also considered current assets, which means they must be paid within the year.
For example, an accounts receivable would be a phone provider billing its users after the users have used the phone service. The phone company will record the bill as AR for the unpaid service until the phone users pay the provider.
It is not uncommon for a company to offer a part of its service to be on credit, allowing its customers to pay portions of the owed bill in increments. It is essentially an interest-free loan the company is giving the client, with the understanding that it will be paid back in a reasonable and set amount of time.
AR is considered a current asset. This means that it can be used as a metric to see how much cash, or liquidity, a company has to cover its short-term financial obligations without adding additional cash flow. In short, AR can be a great gauge to monitor a business’s financial health by measuring its liquidity.
Another important concept to know about AR is its turnover ratio. The turnover ratio refers to a metric that measures a company’s ability and effectiveness in collecting its AR. In other words, it measures how well, and how quickly, a company can manage the credit they have extended to their clients and how fast it is paid back.
So, as we can see, AR is beneficial to a company by its ability to collect on its outstanding financial assets, thereby balancing its credits and debits, as well as offering metrics to measure the company’s financial well-being. This leads to a financially stable and successful business for not only managers and employees, but their clients, as well.
Why Choose Nesso Group?
Now that you know the importance of having a reliable accounting group for your company, as well as the many benefits it can provide, how do you know which one to choose?
Nesso Accounting offers the professional and expert services of AP and AR that your company needs to flourish financially. We are committed to our clients and their business’s success as if it were our own. The Nesso Group offers smart solutions to relieve the stress and burden of maintaining an impeccable accounting record that can withstand any audit and scrutiny.
With our dedicated team of professional accounting experts, we can provide not only an excellent accounting service, but peace of mind, too.
We are committed to our clients, and through our commitment and expertise we foster lasting relationships that will benefit your company for years to come.
Our Mission Statement Is Simple:
We Do What We Say
We bring information on all of your accounts together.
When We Say We Will Do It
We update and track your data on time.
With Your Best Interest In Mind
We deliver the peace of mind that comes with knowing that your accounts are accurate and up to date at all times.
The Nesso Group, and Nesso Accounting, in Connecticut are here to offer you nothing less than excellence and professionalism for all of your accounting needs. It is time to end the stress and struggle a lackluster accounting department brings. Let us do what we do best, so that we can achieve success together.