5.2 Business basics
Calculating profits, calculating sales prices, documenting purchases and sales, planning future business years and making important decisions in the company – and we are already in the middle of accounting. Most of you have probably come across the term before. But what exactly is accounting? What does it include and what is its purpose? Let’s take a closer look at the term accounting and first try to find out which areas belong to accounting.
Accounting consists of four sub-areas: Accounting, cost accounting, statistics and planning accounting.
Let us now take a closer look at the individual sub-areas:
a.) Bookkeeping:
Bookkeeping is, so to speak, the basis of accounting. Its task is to record and document all income, expenditures, and other financial transactions. It thus provides important figures for cost accounting, statistics, and planning. The following example illustrates what this means for your everyday work
You purchase a new, more efficient piece of equipment worth €10,000 for production and receive an invoice for it. To ensure that you still have an overview of your income and expenditure in your company at the end of the year, the accounting department records the invoices and documents the payment flows.
b.) Cost accounting:
The second major area of accounting is cost accounting. Thus, companies are always faced with the question: How high should the price be that is charged for a product? How high are the production and personnel costs for it? And most importantly: can a profit be made with it? Cost accounting provides us with important information to answer these questions. It is responsible for calculating sales prices and provides an overview of company costs. Cost accounting receives the figures it needs for its calculations from accounting. The information obtained through cost accounting helps the company to make important decisions and plan future processes.
You want to sell a car in your company and have to set the price. Not so easy, because if the price of the car is too high, interested parties will buy the car from cheaper competitors. If you charge too little, the costs incurred cannot be covered. So you need cost accounting to be able to calculate the price efficiently.
In cost accounting, some terms come up again and again, which we will try to clarify briefly in the following.
The first term that catches the eye, as the name already tells us, is “costs”. “But everyone knows that word!”, you may think. But even though we use the term almost daily, its definition is not as self-evident as it seems at first glance. There are many different ways to explain the term. However, we will limit ourselves to its definition within cost accounting:
Costs are understood to be the value of all goods and services that were required in the course of a certain accounting period (e.g., a year or a month) for the implementation of operational services (e.g. products).
In short, costs are incurred when creating products or services.
In addition to the calculated costs, income and expenses are also relevant for cost accounting.
In cost accounting, income is all actual inflows of a company. We call these inflows liquid funds. If we speak of income, these liquid funds are thus increased. However, these do not only consist of receipts but also all kinds of credit transactions, i.e., receivables and payables. If the income and receivables increase and the debts decrease, we are talking about revenues.
Income is the total of all receipts, increases in receivables and decreases in debt.
Expenses are defined as the total of all disbursements, increases in receivables, and increases in debts. In short: liquid funds decrease.
Examples of the most common Incomes and costs:
A worker’s payroll: cost.
What the company must pay for the social security of its workers: cost.
The sale of merchandise to customers: income.
Water and electricity bills: cost.
The provision of services to customers: income.
Petrol needed to get the job done: cost.
Profit obtained from the sale of machinery: income.
Bank fees: cost
Let us now go one step further. Thanks to cost accounting, we obtain important data that are in turn necessary for successful business management. Namely for the planning, management, and control of all areas of a company. And here we are in the middle of controlling.
“Controlling = control?”, you may ask yourself. In any case, you are already on the right track.
Controlling has a controlling function in a company. Its task is to whether a company can achieve its goals with the available resources, to observe the competitive situation as well as to assist in goal setting.
The most important tasks of controlling are both operational and strategic:
- Operational: This includes ensuring the profitability of a company as well as the planning calculation.
- Strategic: This includes market analysis, advising the management and preventing wrong decisions.
c.) Statistics
The third major area of accounting is statistics. It processes and analyses figures from accounting and cost accounting and presents them in the form of tables, graphs, or key figures. Business statistics thus provide a company with important information for controlling the company’s activities as well as a collection of data needed for future business planning.
With the help of these data, target-performance comparisons, but also time comparisons and inter-company comparisons can be calculated.
Target/actual comparison: The target/actual comparison aims to find out where the weaknesses of a company lie when the actual state deviates from the target state.
Time comparison: Here, figures from previous periods are compared with those of the current period. This can be used to illustrate changes and developments in the company.
Inter-company comparisons: Here, different companies in a similar sector or individual companies in the same enterprise are compared with each other.
d.) Planning
As the last sub-area of accounting, we take a closer look at business planning. It helps a company to plan its operational success and to make important decisions relevant to the future. To ensure that this is not left to chance, planning accounting is needed. This uses relevant data from cost accounting, statistics and accounting. With the help of this data, the planning calculation compares the planned expenditure and the predicted income and can thus plan the anticipated budget.
You have now become familiar with all four sub-areas of accounting and thus have an important tool in hand to understand, observe and help shape the economic processes in your company.
Effective cost management:
Know how much money you have and decide how much you want to invest.
Set a timetable to plan and prepare the annual budget
Prepare a for planning and budgeting
The budget must be realistic. That includes analyzing the current situation, asking which goals you want to achieve during the year and calculate the expected incomes and how much money will have to be invested to achieve them.
Each category of expenses must have a limit.
Always define a specific budget for emergencies
