How Finance and Accounting Functions Are Performed
The accounting and finance department is responsible for two key business goals: financial planning and budgeting. It provides financial information to other departments for decision-making and curbs money mismanagement or wastage within the company.
A strong accounting team is the foundation of future-proofing your business, especially in a post-pandemic world. Learn how these functions work together to support your growth.
Keeping track of money going out to suppliers, vendors and contractors is a key function for the finance department. Unlike the more fluid cash flow statements of accounts receivable, items classified within accounts payable are long-term debts, which is why they’re usually recorded as liabilities in your general ledger. Accounts payable covers expenses for products, travel expenses, raw materials and transportation but excludes payroll costs.
Your accountant records entries into your general ledger whenever you receive an invoice from a supplier or vendor. When the accountant credits accounts payable, they decrease the liability balance for your business, which increases your cash available to pay for current obligations. Accounts payable is an important figure in a company’s financial statements, and if it increases over the previous period, it means you’re buying more goods or services on credit than you are paying cash. Managing your accounts payable can improve the efficiency of your business by helping you negotiate discounts or extend payment terms with your suppliers.
Businesses and self-employed individuals sell goods and services, but these transactions aren’t always paid immediately. The accounting department manages these invoiced amounts owed to the company through the accounts receivable function. They handle invoicing, payment collections, cash application and deductions, and credit risk management.
Accounts receivable shows up on a company’s balance sheet as current assets, representing the total value of all outstanding invoices. Managing accounts receivable and ensuring payments clear when due is paramount to maintaining your business’s ability to function without suffering from a cash crunch in the short term.
The accounts receivable process utilizes the principles of accrual accounting. This type of accounting means that when a sale is made or an expense is incurred, the appropriate entry is recorded in the books without transferring the actual money from one account to another. The results of this are displayed on the financial statements at the end of each period. The resulting data is used by business leaders to make informed decisions.
The general ledger is a central repository of all the accounts that feed into a company’s key financial statements, like the balance sheet and income statement. Typically, every transaction that occurs within a business will first be recorded in the company’s accounting journal and then posted to the general ledger.
The account numbers that comprise a company’s general ledger are taken from the company’s Chart of Accounts (CoA). The CoA is a categorized list of all the accounts that a small business uses in its operations.
The general ledger is the single, agreed-upon record of all of a company’s transactions and it provides the raw data used to prepare the company’s key financial statements. At the end of each financial period, a company may need to make adjusting entries to ensure that the general ledger is accurate. This process is known as a GL reconciliation. During the reconciliation process, accountants double-check important accounts to verify accuracy.
The payroll process is complex and requires adherence to federal, state and regional rules and regulations. It includes paying employees and remitting taxes, keeping records of deductions, and reporting the results. Getting it right from start to finish is vital for the company’s reputation and legal compliance.
Accounting teams are responsible for ensuring that the company’s financial records are accurate and up to date. They also provide information to other departments that can help them make informed business decisions. For example, the finance department may provide sales and profit realized data to help the marketing team set a budget for their next campaign.
Both the HR and finance departments need to work together to ensure that payroll processes are effective and efficient. They should both understand each other’s challenges and objectives, such as balancing time pressures and budgetary constraints. A good solution is to use technology and automated processes that simplify the responsibilities of each department.