K.I.S.S. The Accounting Process & C.O.A
Posted: Monday, November 09, 2009
by John Lenz
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The Income Statement is one of the most valuable tools you have for monitoring and controlling profitability. The Chart of Accounts for the Income Statement is designed so the financial information is easily separated into profit centers or departments and the numbers tell a clear story.
The Chart of Accounts tracks financially the activity of the company. The financial activity as to how Revenues, Direct Costs (Time and Material), Indirect Costs and Overhead Expenses are to be classified, recognized and reported is determined by the accounting policy (that should be in place). The Chart of Accounts is simply a list of accounts. Each title reflects the nature of each Cost or Expense charged or type of income credited to it. The organization of the individual accounts must reflect the nature of the operation and the organization of the business.
The function or purpose of the "Chart of Accounts" as it relates to the Income and Expense Statements can be explained graphically by way of flow chart. The Flow Chart shows the process of synthesizing the accounting information from previous accounting periods, developing a Budget, and creating a system that will efficiently and effectively develop or "Flag" potential problem areas for review and attention.
Management is most effective if it practices "Management by Exception". This term means that Management's attention is concentrated on those areas of the business that need attention. The Management Information System "Flags" the events or trends that deviate from the plan. The accounting system by way of the chart of accounts records or tracks the activity of the business and is the basis of the management information system. The accounting systems accounts are then measured against the plan and exceptions are found. The variance analysis process (not covered here) is systematic approach to finding those accounts that vary from the budget by a significant amount.
Flexible budgets allow for assessing the impact of variations from the projected Revenue volume levels. This is especially valuable tool when the projected Revenue volumes are not consistent throughout the accounting period. The effect on profit can be analyzed for variations in Revenue volume. Fiscal Budgeting (will be discussed later). We are looking for either positive or negative trends. Positive trends should be investigated and promoted, negative trends should be investigated and corrective action initiated.
The Chart of Accounts should be of sufficient detail to allow management with the information to "Manage by Exception". The chart of accounts should not be too detailed so as to loose the information in the fact that every item paid is classified and the trends of the business are clouded by the detail. More help see guruofhardknox.com
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