In the 21st century, particularly after a combination of the Global Recession and issues surrounding companies like Enron and Arthur Anderson, there has been a new paradigm about accounting in the media, for stakeholders, governments, and professionals alike. There are a number of ways to accomplish this new paradigm, which revolves around trust in reporting numbers, the use of numbers in particular financial documents, and the manner in which those numbers are reported (time, weight, relativity, etc.). As the world embraces globalism, it is even more important to have a way to read and understand financial documents, regardless of the country or region of origin (Godfrey and Chalmers, eds., 2007). In fact, it was the mis-reporting and timing of reporting data that used accounting to defraud stakeholders — leaving the general public concerned about numbers and with a considered inability to trust accounting documents in general. Through the use of a best-practice model, accountants globally have moved towards consistent methods in both the public and private sectors.
Regardless of the country of origin, most accountants follow GAAP, or “generally accepted accounting principles,” which converges with the International Accounting Standards Board. GAPP,” has very specific meanings for the accounting profession. These principles govern the licensing and standards of all accountants, and were designed to allow the ethnical believability of certified accounting documents throughout the industry. These guidelines are a standard, a framework for fiscal accounting reporting and responsibilities. It includes, but is not limited to, rules accountants should follow in recording and summarizing transactions and preparation of documents (for more, review: Financial Accounting Standards Board 2012). The basic issue surrounds the manner in which both public and private organizations utilize data — just as it is with international organizations. Using data must have some degree of commonality between public and private sectors in order for reporting to be understood and transparent.
As managers, it is important for you to understand that there are clear principals of revenue recognition (how cash is accounted for on the books) and the matching affect the timing of this has (fiscal year, tax year, quarters, etc.). Generally, it helps to understand four basic points about matching:
1. The item must meet the definition of a specific element within a financial statement;
2. The item has a measurable effect upon the financial statements;
3. The information is relevant and important in order to make financial decisions, and 4) the information is reliable, and most importantly, verifiable .
For instance, when we look at specific issues that managers deal with, the accounting department must look at the way issues flow into the overall corporate books. For example:
Cost of Labor and Materials for X Product
The cost for the product must be recorded during the time period allocated for production, not sales. Once the item is produced, it goes into current inventory.
Cost of research and development
This is a rather soft cost, and is sometimes ongoing or long-term, and not specific to a certain product. If it is, then it is allocated differently, and may also become a fixed cost (regular and measurable for the entire organization for every month).
Lab Equipment used to make products
Supply cost, allocated per product based on a percentage of use or time for product x, y or z.
Office Equipment for HR
Likely a fixed cost — HR is an ongoing activity, the equipment is used theoretically 24/7, and is amortized based on usage and life.
A fixed cost that does not vary, hard costs that are regular and spread across the company.
Typically recorded during month or pay period that the salary is paid out.
Finally, there is an increasing focus on Corporate Social Responsibility in accounting, which is both transparency of accounting data and the manner in which accountants report issues. This is a self-regulated approach that means items are true, placed in appropriate categories, and noted on the books at the most appropriate time for recording (e.g. not hiding production or commission expenditures until after sales, etc.
Thanks for your attention to this matter.
Godfrey, J, Chalmers, K (eds.) 2007, Globalisation of Accounting Standards, Edward Elgar Publishing, Cheltenham, UK.
Granof, M., et al. (2011). Core Concepts of Government. New York: Wiley.