Many people confuse the roles of the accounting department and finance department with being the same. In reality, both departments perform separate functions.
The function of the Accounting department
The function of the Finance department
No organization can operate profitably without an accounting team. It is the lifeblood and center of any business or organization. To help accountants and accounting departments worldwide, we’ve compiled a list of the seven essential functions that every accounting department needs to master for seamless operations. Let’s get started.
Accounts payable/cash disbursement refers to money that goes out from the business and is recorded as a liability in the accounting book. The accounting department keeps records of the goods and services that your company pays for and ensures that all your business expenses get paid on time.
It also keeps track of all scheduled payments in the organization, such as inventory, payroll, and other business-related expenses. It receives invoices from vendors, records them, and then processes the payment checks.
The accounting department also helps businesses identify areas to cut costs and save money. If there are opportunities to get discounts from paying vendors early, the accounting department will point it out to the appropriate decision-makers.
It is best to have different individuals in your accounting department performing different roles. You can assign someone to record the accounts payable and put another person in charge of signing the checks. Businesses often use AP automation software to streamline this process.
An AP and AR automation software helps businesses manage all invoices and transactions between a company and its suppliers/vendors. Automated AP software also integrates with other accounting software to streamline invoice management and financial reporting.
A research carried out by SoftCo, indicates that 51% of businesses found manual data entry and inefficient processes their most challenging pain point.
Accounts Payable (AP) processes in many organizations often involve paper-intensive tasks. Paper-based processes and manual data entry are the most inefficient ways to store records as it leaves room for inaccuracy and inefficiency in the data.
Paper easily stacks up, making it cumbersome and difficult to store. Additionally, when you need to find a particular document, it takes a while to find it, even with the best file storage system.
AP workflow automation could help increase the efficiency and productivity of your accounting department.
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Accounts receivable refers to money/cash or receipts that the business receives. The accounting department is in charge of tracking and accounting for cash payments by customers for goods sold and services rendered.
It is also responsible for creating and tracking invoices. The accounting department also sends friendly reminders to ensure that customers pay up their invoices when due.
Pro-tip: Businesses can apply for invoice financing to provide cash flow for urgent needs while waiting for customers to pay their invoice obligations.
The accounting department records accounts receivable as assets. This includes the revenue that the business makes and the invoices that are yet to be fulfilled.
It is best to assign the different accounts receivable tasks to different individuals in your accounting department. You can put an employee in charge of recording the cash payments and put another in charge of bank deposits, for instance.
Payroll management is a vital function of the accounting department. They keep employee morale high by paying their earnings on time regularly.
The department needs to ensure that employees’ earnings are up to date. It also estimates the wages or salaries left after the appropriate deductions have been made.
The role of the accounting department includes calculating employees’ bonuses, benefits, and commissions accurately. It also tracks employees’ time off, such as sick leave, PTO, vacation, and absence.
Payment of government taxes on behalf of the company is another function performed by the accounting department. Some of the taxes include FICA, unemployment, social security taxes, federal and state withholding, and workers' compensation.
Qualified accountants in the accounting department assess your taxes and ensure you stay compliant with the latest tax rules. It also tracks and makes tax payments to the appropriate state and federal government agencies.
Failure to make tax payments at the appropriate time is costly and can attract a steep penalty if done repeatedly. Tax evasion is a crime that businesses can find themselves committing without a functioning accounting team. The accounting department ensures that your business does not miss a tax deadline.
Additionally, payroll is a critical and complex accounting function that every accounting department needs to master. Some organizations even outsource payroll functions to external accounting agencies that specialize in payroll management.
A payroll management system automates your payroll processes, making it easy to improve your productivity. Some of the benefits of using an automated payroll software are:
Inventory refers to the total number of goods that a company owns in its warehouse or building. The accounting department is responsible for inventory cost management. It keeps track of the organization’s inventory costs such as labor, raw materials, and other overhead factors.
Additionally, although the accounting department would ideally want to lower inventory costs, it would need to ensure it's not at the expense of the product quality. The department must also aim to find a middle ground between satisfying the customer and increasing the business profit margins.
Businesses make different purchases such as raw materials for goods, types of machinery, and more throughout the year. Some are bought on credit and financed with loans. The accounting department records and tracks the business liabilities and ensures payments are processed on time. It also keeps detailed records of all the cloud inventory purchases made by the company.
The accounting department is responsible for identifying, tracking, and recording all cash received from sales and other sources in the company. Apart from recording it in its database, it also ensures that money is paid into the appropriate checking account.
Accountants ensure that there is a steady flow of cash in the business for its day-to-day operations. Additionally, they are tasked with balancing the business checkbook. Large corporations assign most of the cash flow responsibilities to the treasurer.
A key function of every accounting department is the systematic record-keeping of the company’s financial transactions. Modern accounting departments make use of accounting software to automate their financial record-keeping duties. The best accounting software in the market is QuickBooks, Xero, FreshBooks, and other QuickBooks alternatives.
Your accounting department is responsible for ensuring that other departments in the company stay within the limit of the company’s budget. It tracks expenses and other transactions to protect the company from excessive spending.
Budgeting should be based on both a cash and accrual basis. According to Investopedia, “Accrual accounting is an accounting method where revenue or expenses are recorded when a transaction occurs rather than when payment is received or made.”
Budgeting based on an accrual basis makes you lose out on vital details about your cash flows. Also, budgeting based on a cash basis may not provide you accurate information about your performance. The solution is to combine both models for better budgeting performances.
Another function that the accounting department plays in the organization is the delivery of financial statements. The main reason why the accounting department collects financial information is to prepare accurate reports and financial statements.
Companies depend on these financial reports to make better decisions, forecasts and prepare budgets. These reports prepared by accounting departments also include internal communications. Additionally, profit or loss can be determined and sustained better with the availability of these reports and statements.
The accounting department is also responsible for producing end-of-the-year financial statements. The company uses such reports to prospect leads, communicate with investors and other professionals contributing to business growth.
Providing financial reports and statements at regular intervals is a vital function of the accounting department. Some examples of financial reports and statements include a balance sheet, statement of activities (income statement), and cash flow statement.
Another vital function that every accounting department needs to master is tracking and staying compliant with relevant financial laws.
A typical accounting department has more than one employee. The functions that the accounting department performs are large, time-consuming, and labor-intensive. There is a need for every accounting department to have an organizational structure for increased productivity.
Every function the accounting department performs can be handed over to certain individuals for better performance. It is the structure of the accounting department that determines if it can handle its primary functions efficiently. A pre-employment accounting test is an unbiased and effective way to get insight into potential candidates' skillsets and build an accounting department with exceptional accounting skills.
Create an employee handbook to streamline your hiring process and gauge predictive role performance, you can also consider making pre-employment assessments a part of your custom workflows.
Investing in its structure is one of the best ways to improve your business efficiency. The accounting department is headed by the Chief Financial Officer (CFO).
The CFO is the highest hierarchy officer in any accounting department. He or she reports directly to the Chief Executive Officer (CEO) or the business owner. Some of the roles the CFO plays include:
The CFO should have extensive experience in the accounting and financial industry and have at least an accounting degree.
The financial controller works with and reports directly to the CFO. They are responsible for managing financial accounting tasks such as preparing reports, budgets, inventory, and so on. Also, they oversee the day-to-day accounting activities and assign tasks to other employees in the department.
The controller is also responsible for communicating the business financials in a language that can easily be utilized to manage the business. They provide accurate financial reporting and analysis that helps understand the business’s financial health and performance.
Additionally, statistics such as Key Performance Indicators (KPIs), performance reviews, and other metrics are communicated through graphs, infographics, and charts.
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In large corporations, the financial controller has three division managers reporting directly to him or her. In such instances, encouraging your staff to be taught management skills and accounting skills can come in handy. Additionally, some managers handle other specific functions, such as:
Each division manager has a team of accountants. Smaller organizations may assign these three functions to an individual.
The accounting manager is responsible for maintaining and reporting financial transactions. He or she oversees the works of other accountants in the organization.
Another crucial role accounting managers play is to provide checks and balances for the company by detecting theft and fraud. They ensure that employees keep to accounting principles and follow the company’s requirements.
An accounting manager is knowledgeable about accounting requirements and GAAP rules.
Accountants that do not hold any position in the accounting department are called staff accountants. They are responsible for day-to-day accounting activities as assigned to them by the accounting manager and other superiors.
Some of the tasks they perform include:
Staff accountants hold a degree or training in accounting. Organizations should also organize employee training and development opportunities for accounting staff.
Interns generally assist accountants in research, data entry, and other tasks assigned to them. They often get tasks that do not require much accounting experience.
Your accounting department should master and perform seven crucial functions. They include account receivable and payable, payroll, inventory management, budgeting, reports and financial statements, legal compliance and financial control, and record-keeping.
These functions account for the bulk of time, labor, and resources expended by the accounting department. You can improve your accounting department’s efficiency and productivity by using accounting software to automate these functions.
Accounting automation helps accounting departments automate their invoices, payments, payroll, bookkeeping, and taxes. Additionally, you can use new age expense management software like Fyle to track all the business expenses from one central platform. The software also makes it easier and faster for accounting departments to close their books with real-time expense reporting.
You can also use online inventory management tools to automate your accounting department inventory workload. Additionally, project tracking tools make it easier for you to track your accounting department and individual employees’ activities.
Future-proofing your business, especially in a post-pandemic world is very important. Hope this article helped you understand the most important functions of the accounting department and their importance!
