When you think of accounting, you probably think of numbers. The process of accounting is sometimes referred to as “number crunching.”
Numbers are a form of data. In other words, they are information that has been quantified. Data can be letters and words, not just numbers, but numbers are still the primary form of data. Therefore, students learning accounting in the modern context of analytics should start to think about connecting accounting with data.
Accounting is a field built on data. Without data, there is no accounting. In fact, you can think of accounting as a field that processes data, summarizes data, reports summaries of data, and verifies that data. A ledger is a form of database that records transactions in the form of credits and debits. Therefore, accounting 101 begins with the process of data collection, cleaning, and organization. These are the introductory steps in the analytics process that are a critical foundation to the later steps. An individual or a corporation must keep a record of all credits and debits in order to make sure that all transactions are legitimate and all accounts are up to date.
Financial statements are a good example of how accounting works with data. Financial reports like the income statement, balance sheet statement, and cash flow statement are all summaries of an entity’s financial condition. For instance, an income statement summaries various groupings of revenue and groupings of costs and then reports the difference as profit. A balance sheet reports sums of various groupings of assets and liabilities. When you start to think of these categories as “sums of groups,” it starts to sound like a giant PivotTable in Excel. A financial statement reports a summary of the financial data associated with the entity.
The most basic application of data analytics to accounting is descriptive analytics. We often think of accountants as answering the question, “What is?” We use accounting to describe the financial condition of an entity, like personal accounting for an individual or financial accounting for a corporation. This form of accounting is primarily focused on establishing the facts. Accountants make sure that all the numbers are true and all the calculations are accurate. In the language of data, this is the first step of analytics after collecting, cleaning, and organizing the data. Accountants get all the data in one place and then produce summary reports that describe the key features of the data.
As the field of accounting is being transformed by data analytics, the emphasis of accounting is shifting beyond descriptive analytics. Accounting is becoming more advisory as individuals and corporations look to internal and external accountants for help in decision-making. Establishing the facts is important, but doesn’t help with understanding the data or thinking about what to do with the data. The higher levels of analytics – diagnostic, predictive, and prescriptive – deliver value that is far greater than descriptive analytics. Therefore, accounting firms are developing their analytics capabilities to complement their fact-based accounting role. Being able to offer clients additional analytical insights can be a key differentiator between accounting services. Data visualization is a big part of how accountants can help communicate their findings in more relevant and compelling ways. In this way, accounting isn’t just reporting the numbers, but rather it is about effectively communicating key insights.
Accounting is also being transformed by data collection and automation. Data is being collected at higher volumes than ever before (“big data”) and the processing of data is happening at faster and faster speeds. This has changed the traditional picture of an accountant as someone studying a large pile of paper covered in numbers and doing calculations on a calculator. More modern accountants use spreadsheets like Excel, not paper and calculators. But even this is changing. Data is pouring into information systems at a daily or even hourly frequency and needs to be processed and analyzed in a more automated way. Accountants don’t have the luxury of collecting data over long periods of time and then manually doing calculations before providing any reports. This is still the standard practice for quarterly financial statements. However, corporations are now looking for more high-frequency monitoring of data and reporting. This means that the “mechanics” of traditional accounting are going to become more and more automated over time. Internal accounting is largely about transforming internal data into an asset that can be used by the firm. Speed and accessibility of that information is critical to making full use of data as an asset.
The future of accounting is a mix of data and technology that translates raw information into meaningful, real-time communication. A good example of this is a dashboard. A dashboard in a car translates raw information about the car’s condition and performance into a set of key performance indicators (KPI) for the driver. Many corporations are now seeking to construct real-time dashboards for their performance as well. If managers and boards of directors are going to effectively run corporations, they need good data analytics to monitor how things are going. With a dashboard for their firm, corporate managers will be much more effective at making business decisions for “driving” the firm forward. Accounting is the field that will make this future a reality.