Effects of Culture on Accounting

Effects of culture in accounting

Belinda Wells

Liberty University

Introduction

Culture, as described by Geert Hofstede is defined as “the collective programming of the mind that distinguishes the members of one group or category of people from others (Kolesnik, 2013).” His definition of culture is the one most relatable to that of a business culture and organization.  Various elements of impact accounting systems as well.  An accounting system is defined as a set of either manual and or computerized accounting methods, policies, procedures, and controls.  They are created to record, analyze, and interpret financial data to assist in management decisions.  The systems are built specifically for the business transactions and business operations (Kuchta & Sukpen, 2011).  Some of the most important accounting systems include the Management Accounting System (MAS), Financial Accounting Systems (FAS), and Tax Accounting Systems.  

Management Accounting Systems

        The MAS does as it name says, it provides information to the managers in an organization that are in control of operations.  They are used to be able to provide management information to be able to create an effective organization. A company’s value can increase by enhancing the overall effectiveness by using an MAS (Fen, et. al., 2004).  It is extremely important to understand the variables used in a MAS to help with overall motivation and decision-making.  

        The information that is found in a MAS include: the cost of products and services in the organization; budgets; reports on performance; and other useful information that allow managers to help plan and control activities in the organization.  They are used primarily to measure the overall effectiveness of internal workings (Hoxha & Tartaraj, 2014).  With the development of stronger MAS would allow the door to open for businesses to excel in an increasingly competitive business market.  Original MAS have developed and changed over the years.  Original MAS have been criticized for using old techniques that were more concentrated on labor intensive instead of technology enhanced institutions (Kucta & Sukpen, 2011).  Request have been made to update the systems, however, there has been no confirmation that the newer systems that have been developed are better that the older systems.  

        One of the new systems that has been developed is an activity-based-costing system that has removed the focus on direct labor and focuses on activities such as the number of production runs that drive costs.  This type of MAS allows management to gain a clear picture of what the cost drivers are and how they can reduce those cost. Previous management accountants were based upon variance analysis, which compares actual budgeted costs and revenues during a period of production.  Variance analysis is still using in the manufacturing environment, but now it is also used in conjunction with a balanced scorecard (Fen, et.al, 2004). The balanced scorecard measures financial, customer satisfaction, internal processes, innovation of ideas, and improvement on activities.  

The original variance analysis, allows managerial accountants to compare actual sales and budgeted sales.  However, it does help it determining which factor produces unfavorable conditions which causes the company to lose money.  Thus, the reason for change into a newer system.  Some of the key elements of a MAS is the fact that the information is not based upon historical data, it is based upon overall use not specific case based, the information is confidential and is only used for management purposes, and since it is not for public knowledge they typically do not follow normal financial accounting standards.  

Financial Accounting Systems

The main purpose of accounting is to be able to provide information that can be used to make informed economic decisions, a financial accounting system (FAS) is used to prepare financial reports about a company’s performance for external purposes (Hoxha & Tartaraj, 2014).  Financial accounting is comprised of corporate accounting and outside reporting systems that generates public data on audits, data pertaining to the financial position of the company, and the company’s overall performance for public corporations.  Financial accounting systems provide important information that allows separation from managers and financiers.  The information is then used for decision making purposes for individuals that are not directly involved in the daily management of the organization (Fen, et.al, 2004).  

Management feels that the reports generated by financial systems are insufficient for making decisions about the organization.  These reports are not generated to give the value of the company, but for others to be able to analyze the data and determine the value of the company for themselves.  It is important that the reports generated are credible, easy to understand, and comparable to the reports of other companies (Kolesnik, 2013). Financial systems follow accounting standards known as Generally Accepted Accounting Principles (GAAP) to ensure consistency. Financial is primarily focused on providing credibility and accountability to create a secure place in the stock market.  Financial accounting, also provides the outline for how transactions are recorded and reported.  

Tax Accounting Systems

        These systems, just as the name states, are focused on tax information and not for public financial statements.  These systems are governed by rules that are specific to companies that are mandated by internal revenue codes (IRS).  This area of accounting systems has gone through the most change to keep up with the times and changes that have taken place to IRS codes (Wisna, 2015).  It is imperative that these systems remain up-to-date on all policy changes to ensure that businesses are paying the appropriate taxes.  Hence, it is extremely important that the individuals making the tax policies and those who are executing the policies work together to ensure that the tax systems remain up to date.

        Tax accounting systems typically have two methods that are used to be able to file tax returns.  One is a case base method and the other is an accrual based system.  A cash base system accounts for income earned when the cash is received, where as an accrual system calculates income when the task is completed even if no cash has been exchanged. The biggest advantage of a cash based tax system is that it is more streamlined than that of an accrual system.  It is focused on gathering information that is useful for tax preparation at the year-end.  The use of a tax-based system allows owners to make better budgets and better predictions about acquisition. They can also obtain a clear picture of their profit or loss margins and any tax benefits or discounts that they may be entitled to.  Tax systems allow a company to analyze all purchases and expenditures beforehand to see the tax implications which allows management to have a better understanding of the effects on cash outflow and income (Fen, et.al, 2004).