ACCOUNTING MACHINE

also called Bookkeeping Machine, office machine capable of performing normal bookkeeping functions, such as tabulating in vertical columns, performing arithmetic functions, and typing horizontal rows. The billing machine is a class of accounting machine designed to typewrite names, addresses, and descriptions, to multiply and extend, to compute discounts, and to add net total, posting the requisite data to the proper accounts, and so to prepare a customer's bill automatically once the operator has entered the necessary information. Early accounting machines were marvels of mechanical complexity, often combining a typewriter and various kinds of calculator elements. The refinements in speed and capacity made possible by advances in electronics technology quickly reduced the size, noise, and operating complexity of these machines. Many of the newer "generations" of accounting machines are operated by a computer to which they are permanently connected. Managerial accounting Although published financial statements are the most widely visible products of business accounting systems and the ones with which the public is most concerned, they are only the tip of the iceberg. Most accounting data and most accounting reports are generated solely or mainly for the company's managers. Reports to management may be either summaries of past events, forecasts of the future, or a combination of the two. Preparation of these data and reports is the focus of managerial accounting, which consists mainly of four broad functions: (1) budgetary planning, (2) cost finding, (3) cost and profit analysis, and (4) performance reporting. Budgetary planning The first major component of internal accounting systems for management's use is the company's system for establishing budgetary plans and setting performance standards. The setting of performance standards requires also a system for measuring actual results and reporting differences between actual performance and the plans (see below Performance reporting). Figure 1: Budget planning and performance reporting. The simplified diagram in Figure 1 illustrates the interrelationships between these elements. The planning process leads to the establishment of explicit plans, which then are translated into action. The results of these actions are compared with the plans and reported in comparative form. Management can then respond to substantial deviations from plan, either by taking corrective action or, if outside conditions differ from those predicted or assumed in the plans, by preparing revised plans. Although plans can be either broad, strategic outlines of the company's future or schedules of the inputs and outputs associated with specific independent programs, most business plans are periodic plans-that is, they refer to company operations for a specified period of time. These periodic plans are summarized in a series of projected financial statements, or budgets. The two principal budget statements are the profit plan and the cash forecast. The profit plan is an estimated income statement for the budget period. It summarizes the planned level of selling effort, shown as selling expense, and the results of that effort, shown as sales revenue and the accompanying cost of goods sold. Separate profit plans are ordinarily prepared for each major segment of the company's operations. Figure 2: Relationship of company profit plan to responsibility structure. The details underlying the profit plan are contained in departmental sales and cost budgets, each part identified with the executive or group responsible for carrying out that part. Figure 2 shows the essence of this relationship: the company's profit plan is really the integrated product of the plans of its two major product divisions. The arrows connecting the two divisional plans represent the coordinative communications that tie them together on matters of mutual concern. The exhibit also goes one level farther down, showing that division B's profit plan is really a coordinated synthesis of the plans of the division's marketing department and manufacturing department. Arrows again emphasize the necessary coordination between the two. Each of these departmental plans, in turn, is a summary of the plans of the major offices, plants, or other units within the division. A complete representation of the company's profit plan would require an extension of the diagram through several layers to encompass every single responsibility centre in the entire company. Many companies also prepare alternative budgets for operating volumes other than the volume anticipated for the period. A set of such alternative budgets is known as the flexible budget. The practice of flexible budgeting has been adopted widely by factory management to facilitate evaluation of cost performance at different volume levels and has also been extended to other elements of the profit plan. The second major component of the annual budgetary plan, the cash forecast or cash budget, summarizes the anticipated effects on cash of all the company's activities. It lists the anticipated cash payments, cash receipts, and amount of cash on hand, month by month throughout the year. In most companies, responsibility for cash management rests mainly in the head office rather than at the divisional level. For this reason, divisional cash forecasts tend to be less important than divisional profit plans. Company-wide cash forecasts, on the other hand, are just as important as company profit plans. Preliminary cash forecasts are used in deciding how much money will be made available for the payment of dividends, for the purchase or construction of buildings and equipment, and for other programs that do not pay for themselves immediately. The amount of short-term borrowing or short-term investment of temporarily idle funds is then generally geared to the requirements summarized in the final, adjusted forecast. Other elements of the budgetary plan, in addition to the profit plan and the cash forecast, include capital expenditure budgets, personnel budgets, production budgets, and budgeted balance sheets. They all serve the same purpose: to help management decide upon a course of action and to serve as a point of reference against which to measure subsequent performance. Planning is a management responsibility, not an accounting function. To plan is to decide, and only the manager has the authority to choose the direction the company is to take. Accounting personnel are nevertheless deeply involved in the planning process. First, they administer the budgetary planning system, establishing deadlines for the completion of each part of the process and seeing that these deadlines are met. Second, they analyze data and help management at various levels compare the estimated effects of different courses of action. Third, they are responsible for collating the tentative plans and proposals coming from the individual departments and divisions and then reviewing them for consistency and feasibility and sometimes for desirability as well. Finally, they must assemble the final plans management has chosen and see that these plans are understood by the operating executives. Measurement principles In preparing financial statements, the accountant has several measurement systems to choose from. Assets, for example, may be measured at what they cost in the past or what they could be sold for now, to mention only two possibilities. To enable users to interpret statements with confidence, companies in similar industries should use the same measurement concepts or principles. In some countries these concepts or principles are prescribed by government bodies; in the United States they are embodied in "generally accepted accounting principles" (GAAP), which represent partly the consensus of experts and partly the work of the Financial Accounting Standards Board (FASB), a private body. The principles or standards issued by the FASB can be overridden by the SEC. In practice, however, the SEC generally requires corporations within its jurisdiction to conform to the standards of the FASB. Asset value One principle that accountants may adopt is to measure assets at their value to their owners. The economic value of an asset is the maximum amount that the company would be willing to pay for it. This amount depends on what the company expects to be able to do with the asset. For business assets, these expectations are usually expressed in terms of forecasts of the inflows of cash the company will receive in the future. If, for example, the company believes that by spending $1 on advertising and other forms of sales promotion it can sell a certain product for $5, then this product is worth $4 to the company. When cash inflows are expected to be delayed, value is less than the anticipated cash flow. For example, if the company has to pay interest at the rate of 10 percent a year, an investment of $100 in a one-year asset today will not be worthwhile unless it will return at least $110 a year from now ($100 plus 10 percent interest for one year). In this example, $100 is the present value of the right to receive $110 one year later. Present value is the maximum amount the company would be willing to pay for a future inflow of cash after deducting interest on the investment at a specified rate for the time the company has to wait before it receives its cash. Value, in other words, depends on three factors: (1) the amount of the anticipated future cash flows, (2) their timing, and (3) the interest rate. The lower the expectation, the more distant the timing, or the higher the interest rate, the less valuable the asset will be. Value may also be represented by the amount the company could obtain by selling its assets. This sale price is seldom a good measure of the assets' value to the company, however, because few companies are likely to keep many assets that are worth no more to the company than their market value. Continued ownership of an asset implies that its present value to the owner exceeds its market value, which is its apparent value to outsiders. Other purposes of accounting systems Accounting systems are designed mainly to provide information that managers and outsiders can use in decision making. They also serve other purposes: to produce operating documents, to protect the company's assets, to provide data for company tax returns, and, in some cases, to provide the basis for reimbursement of costs by clients or customers. The accounting organization is responsible for preparing documents that contain instructions for a variety of tasks, such as payment of customer bills or preparing employee payrolls. It also must prepare documents that serve what might be called private information purposes, such as the employees' own records of their salaries and wages. Many of these documents also serve other accounting purposes, but they would have to be prepared even if no information reports were necessary. Measured by the number of people involved and the amount of time required, document preparation is one of accounting's biggest jobs. Accounting systems must provide means of reducing the chance of losses of assets due to carelessness or dishonesty on the part of employees, suppliers, and customers. Asset protection devices are often very simple; for example, many restaurants use numbered meal checks so that waiters will not be able to submit one check to the customer and another, with a lower total, to the cashier. Other devices entail a partial duplication of effort or a division of tasks between two individuals to reduce the opportunity for unobserved thefts. These are all part of the company's system of internal controls. Another important element in the internal control system is internal auditing. The task of internal auditors is to see whether prescribed data handling and asset protection procedures are being followed. To accomplish this, they usually observe some of the work as it is being performed and examine a sample of past transactions for accuracy and fidelity to the system. They may insert a set of fictitious data into the system to see whether the resulting output meets a predetermined standard. This technique is particularly useful in testing the validity of the programs that are used to process data through electronic computers. The accounting system must also provide data for use in the completion of the company's tax returns. This function is the concern of tax accounting. In some countries financial accounting must obey rules laid down for tax accounting by national tax laws and regulations, but no such requirement is imposed in the United States, and tabulations prepared for tax purposes often diverge from those submitted to shareholders and others. "Taxable income" is a legal concept rather than an accounting concept. Tax laws include incentives to encourage companies to do certain things and discourage them from doing others. Accordingly, what is "income" or "capital" to a tax agency may be far different from the accountant's measures of these same concepts. Finally, accounting systems in some companies must provide cost data in the forms required for submission to customers who have agreed to reimburse the companies for the costs they have incurred on the customers' behalf. The primary example of these is work performed under cost-based contracts with U.S. military agencies. The measurement rules for this purpose are contained in the Armed Services Procurement Regulations, which embody standards issued by the Cost Accounting Standards Board. In general, these standards conform to the principles underlying conventional product costing systems, but they go beyond them in incorporating provisions for corporate and divisional head office administrative costs.