Accounting Definition : What Is Accounting?

Accounting Definitions - Exploring Liability Concept

Accounting definitions are important for those who is learning accounting and want to master theory and practice. These definitions provide understanding of the main accounting aspects and their practical application. This article will explore definition of liability.

Concept

Considering the definition of Liability we can that it is a debt owed by the business to the third parties, i.e. creditors. Referring to the basic accounting equation, where Assets=Liabilities+Equity, we can see that Liabilities is one of the sources with which the assets of the business are being financed. Liabilities are financial means which do not belong to the shareholders and which have a certain maturity date, i.e. must be returned back at the certain date.

Items Included

Depending on the maturity period, liabilities are divided into 2 groups:

Current Liabilities - these are items which will be due within a period of one year or shorter. Examples can be note payable, accounts payable, salaries payable.
Long-term Liabilities - these are items with the maturity date after one year, i.e. will have to repaid back within comparatively long time. Examples are long-term loans. Usually such liabilities are repaid back in certain parts, therefore part of long-term liabilities can be current, i.e. payable within one year and is included into the current group.

Balance Sheet must provide separate exact information on the above groups of liabilities in order to judge how much current debt business has and whether comparing to the current assets it will be able to pay this debt on time.

Referring to the accounting entries and accounts, Liability Account has a credit balance and when we account for a new debt, increase in it is reflected as a credit entry. When we account for the debt repaid back, we decrease balance of the corresponding liability account by debiting it.

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Accounting Definition - Business Vs Personal

Most people have some idea of what accounting is. Every month we all need to pay our bills, and balance our budget. A business is no different; they need to account for the purchases that they make and the money that is coming in. The accounting department at any successful business is extremely busy; their main focus is balancing the budget. This is accomplished by finding the best cost strategies available and overseeing company gains and loses.

The basis of accounting is fairly simple, but surprisingly not a lot of people are aware of the importance of accounting. If you look at Apple, they have a huge accounting firm, if you have a neighbor whose daughter is selling cookies and lemonade she too should have some accounting skills. The idea of making more than you spend is rather simple. Getting there is the tough part and having exceptional accounting skills is essential.

This day an age with the tough economy that we are experiencing balancing a budget is extremely important. Agriculture is a good example of a business that has to be very conservative in their day to day operations. The old adage that farming was a million dollar business and that now you have to be a millionaire to farm is close to reality today. The total net profit is based a lot on the overhead costs to run the farm throughout the year. Without appropriate accounting skills it is rather easy to lose control of the business with one bad season.

As you can see accounting is extremely important in all of our everyday lives. If you are not sensible with your income and debt load it can lead to serious financial problems. There is very little difference between personal finances, and that of a large corporation. Both must balance the bottom line and hopefully make enough money to save and invest for the future.

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Concept And Meaning Of Decentralization

Decentralization is the systematic delegation of managerial authority to middle and lower level management according to their weightage of responsibility. In practical, it is not possible to delegate absolute authority to the lower level management. Top level management can delegate only substantial power to the lower level management. Therefore, every organization has to decide how much authority should be centralized and how much should be decentralized. Decentralization depends on the size and nature of the organization and responsibility vested on the lower level. The top level management has to delegate such degree of authority to the lower level so that quick decisions and their implementation are possible.

Therefore, decentralization may be known as the philosophy of scientific and systematic delegation of managerial authority to the middle and lower level managers in accordance with their responsibility. This philosophy states that the top level management should keep limited authority and delegate maximum authority to operating levels. Top management has to play the role of supervisor.

Disadvantages Of Centralization

The following are the main drawbacks or disadvantages of centralization:

1. Centralization Is Unsuitable For Large Organization

Centralization is impractical in large business organization having various branches in different locations. It is difficult to communicate managerial decisions to different operating levels in the management hierarchy. Top level managers cannot effectively supervise and control all the activities of the organization.

2. Manager Is Overburdened

In centralization, top managers are over burdened with authority and responsibility while managing each and every activity of the organization. He/she cannot devote sufficient time in other major issues. It tends to decrease working efficiency of the organization.

3. Possibility Of Power Misuse

Centralization of authority at the top level may result in under-utilization of power. Top level managers may exercise their powers on the basis of their personal judgement. This may lead to misuse of authority if the managers lack proper skills and ability.

4. Low Morale Motivation

In centralization. middle and lower level managers feel uncomfortable while performing the assigned task. They do not have the required authority to deal with problems effectively. They do not get any opportunity to show and develop their personality. The lack of motivation tends to affect the morale of subordinates.

5. Lack Of Environmental Adaptation

Business environment is dynamic and therefore, it changes according to time. In business, it is essential to take quick decisions to resolve problems of concerned departments or branches. Centralization is not applicable in dynamic environment as flexibility will not come promptly from the top level.

6. Inappropriate For Routine Decisions

In centralization, top level managers devote maximum time in taking routine decisions. Therefore, they cannot devote more time in non-programmed decisions. This will have a negative impact on the long term performance of the organization.

Advantages Of Centralization

The following are the main benefits or advantages of centralization:

1. Centralization Facilitates Unified Decision

Top level managers take all decisions in centralization. It is not necessary to consult and take consent of subordinates while taking a decision. The subordinates perform activities on the basis of instructions which facilitates maintenance of uniformity and consistency in performance.

2. Centralization Simplifies Structure

In centralized organization, the structure tends to be simple and clear. It involves two levels- managerial and operating levels. Managerial level is responsible for decision making whereas operating level is responsible for execution.

3. Centralization Facilitates Quicker Decision

Centralization facilitates quicker decision as one manager takes all the decisions. Managers can take suggestions and guidance from experts and professionals, but the final decision is taken by him. Quick decision is essential for business success in competitive environment.

4. Economy In Operation

In centralization. many levels and positions of management are reduced. It minimizes overhead cost of the organization. It also helps in effective utilization of skilled, qualified and experienced members.

5. Centralization integrates Operation

Centralization helps to integrate and unify all the operations of the organization. The top level manager maintains close supervision of the subordinates and their functions. On the basis of requirement, a manager takes quick decision to maintain control over the activities of the employees.

6. Centralization Is Suitable For Small Firms

Centralization is highly appropriate for small business organization performing business in a competitive environment. In such organizations, managers can personally look after overall activities of the organization.

Concept And Meaning Of Centralization

Centralization is known as the systematic reservation of decision making authority at the top level management. Centralization reduces the roles of subordinates and the top level assumes full authority of running business activities. Top managers have direct control over each and every activity of the organization while the decision making authority is also vested on them.

Centralizes facilitates a manager to keep in touch with all the activities of the organization and facilitates quicker decisions. This system is highly appropriate in small organizations performing business in a competitive environment. However, expansion of the size of the business creates complexities in business activities of the organization and in such a situation centralization becomes impractical. Top management needs to form departments and branches on the basis of nature of work and decision making authority should be delegated to the departmental heads.

Barriers To Delegation Of Authority

The following are the common barriers in delegation of authority:

1. Reluctant To Delegate

Some managers are reluctant to delegate authority to subordinates. They believe that they can take a better decision than their subordinates. This belief is often found among those managers who have been recently promoted and those having superiority complex. They have no proper plan to delegate authority. In such a situation, subordinates will have less work and lose the commitment to implement the manager;s decisions.

2. Fear Of Losing Importance

Managers who feel comfortable with authority,fear to delegate authority. They feel that it will diminish their importance. Such managers delegate only that part of authority to subordinates which relates to their job responsibility. They retain their authority as a positional superior of an organization.

3. Loss Of Control

Some managers opine that they will lose control by delegating authority to their subordinates.They feel that if they delegate authority to their subordinates, they would not be sure to achieve assigned responsibilities from subordinates. Such fear is reasonable in case managers are incapable of getting the jobs done from others.

4. Mutual Distrust

Managers are often reluctant to delegate authority to subordinates if there is an environment of distrust in the organization.A manager must have confidence in his own ability to help, guide and control his subordinates before delegating authority. If a manager does not have the ability to make a sound decision he does not believe in his subordinates. He does not want to take risk to get jobs done from others.

5. Fear Of Subordinates

Managers are reluctant to delegate authority if they fear that it will expose their shortcomings. They feel that their subordinates will perform better and may create problems in their own career. They have no self-confidence and do not want to face the competitive environment.

6. Incompetent Subordinates

Some subordinates are often unwilling to accept delegated authority because of lack of self-confidence. They fear of making mistakes in their performance. It is the responsibility of the superior to develop their self confidence by guiding them and also creating a supportive environment.

7. Lack Of Motivation

Lack of motivational environment discourages subordinates to take responsibility and accept authority. Such environment is found in organizations where there is lack of reward and judgement system.