Psychology in Accounting PDF

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The Importance of Psychology in accounting...

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IMPORTANCE OF PSYCHOLOGY TO ACCOUNTING AS A DISCIPLINE Psychology affects every discipline in different ways and at different times. It can as well have a huge impact on the results or success of different tasks and activities. To better understand its importance on business and accounting as a discipline, it is essential to evaluate the key concepts in the subject matter in question. What is Psychology? Psychology is simply the scientific study of the mind and behavior. Psychology includes the study of conscious and unconscious phenomena, as well as feeling and thought. It is an academic discipline of immense scope. Psychologists seek an understanding of the emergent properties of brains, and all the variety of phenomena linked to those emergent properties. As a social science it aims to understand individuals and groups by establishing general principles and researching specific cases. What is Accounting? Accounting is a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information. It reveals profit or loss for a given period, and the value and nature of a firm's assets, liabilities and owners' equity. Importance of psychology in business Psychology is a phenomenon. Its role in business administration and management is ever-evolving and growing in importance. The increase in awareness and education in recent times forces people to think and act rationally. More and more people are learning the importance of the same and tapping into the enormous potential of applied and business psychology to be successful. The importance of psychology in every aspect of business operations and organization cannot be overemphasized. Understanding the human psychology, be it either employees or customers or business partners, helps companies in better management and grow their business. Business is multifaceted, what is common across all the areas, however, are people. All the stakeholders from the shareholders to the managers to the government to the employees are comprised of people. Since, where people are involved, psychology is involved, psychology has it

effects on all the aspects of a business. It helps us understand the human behaviour and reasoning behind thoughts, processes, actions and goals. The shareholders have a vision before investing in a business. The goals, missions, objectives etc are based on this vision. The psychology of the share holders helps decide whether the business is for profit or has a social objective. Share holders decide which shares to purchase depending on their inherent values and psychology. Some share holders do not invest in stocks of companies associated with alcohol. This is their personal belief. In small firms where decisions are taken by the shareholders, management policies are affected by the psychology of the shareholders. The psychology of the employees is particularly difficult to explain since all employees are at different levels of the hierarchy. There are supervisors and reportees to consider. There is the top, middle and lower level managements to consider. All of whom are different and have different motivations and needs. The top level usually controls the labour force. They should be efficient and organised. Along with being strategic thinkers, they should also have the ability to predict or at least understand how people would react to policy decisions and changes. They should have the ability to be good leaders. Understanding psychology helps managers lead the team to great success. The middle level needs to lead the lower level but also work according to the guidelines issued by the top management. Conflict managements, negotiations etc would be common and they should be comfortable with it. Identifying potential employee related problems and solving them before the affect the bottom line of the company is necessary for them. The middle level management should be given proper incentives so that they are loyal to the company. The lower level management should have outlets for grievance redressals. They should be made to feel a part of the company. Attrition should be reduced. Absenteeism, union problems, inefficiencies should be addressed at the grass root levels. Using human psychology to improve efficiencies has been very beneficial in recent times. Consumer psychology is another very important aspect. Understanding customers’ needs, wants and desires is integral. Tools like market research, surveys, etc helps in determining which product would be well received and which would not. Decisions to increase or decrease production, decisions on distribution channels, sales promotion techniques all depends on the psychology of the customers. Tactics used to influence customers could be influence and persuasion. Understanding the psychology of the customers is the key to maximising profits of the company.

Companies also use consumer psychology to predict what kinds of products customers would want in the future. Research and development is then conducted on these ideas and theories to make products the customer wants. Supplier psychology helps us negotiate for fair rates which in return affects the profits of the organisation. It also helps us choose the right supplier according to our needs. These are the major dimensions of the business which are influenced by psychology. Psychology also plays a major role across departments from Human Resources to production to finance to sales. All are influenced by the psychological requirements of the people involved. In the Human Resources department, psychology is used to Fine-tune the hiring processes. Appropriate measures are taken to curb attrition, increase employee retention, increase employee productivity and loyalty using psychology as a factor. Deciding on appropriated employee review methods and frequency is taken by keeping the psychology of the employees in mind. In the Production department decisions like what to produce, how much to produce, how to produce, where to produce depends on the psychology of the customers and the labour force. Ideal working hours, wage rate are all determined using psychology as a guiding factor. In the Finance department, identifying which costs can be controlled and minimised, investment decisions, the incentives which can be offered, the pricing of the product are all made keeping in mind the psyche of the people concerned. In the Advertising and Promotion departments, deciding which advertisements would appeal to the customers, the duration of the advertisement, the target audience, the timing of the advertisement, the medium used are all dependent on the organisation’s perception of the consumers’ psychology. In the Sales and distribution department, deciding the channels of distribution, the quantity of stock to be kept, the shops in which the stock is to be kept, etc all depends on the consumers. Apart from all this, Innovation is completely based on understanding the psychology of the markets. Trial and error methods are the order of the day, but these need to be based on facts and opinions. Psychology helps us understand the models that businesses before us have used and also helps us adapt the same to our innovations in these everchanging times in order to create business models which would make us successful. In short we can learn from our predecessors and adapt their successes without suffering through their failures.

Importance of Psychology to Accounting as a discipline As indicated above, psychology spreads across all borders and disciplines. In fact it affects the daily activities of every living creature in different ways. Accounting like every other disciplines involves a lot of reasoning and decision making which all depend on the cognitive functions of the mind. From financial management to auditing, accountants are expected to perform series of tasks with maximum focus and accuracy. Below are descriptions of basic accounting functions and the roles played by psychology in their execution. Numbers and Behaviors When accountants and auditors enter into relationships with clients, an undercurrent develops between the financial practitioner and client that involves dependency, trust and control. Initial interactions, based solely on fiscal matters, become “subject to emotions, pressures, fears and cognitive limitations,”. The evolution of the relationship between accountant and client morphs from number cruncher to counselor, but if the accountant has no grounding in cognitive psychology, the relationship that develops may not be as successful. Auditing When an auditor is hired to verify financial records, part of his/her job is looking for financial irregularities. To probe possible cases of fraud or figure manipulation, auditors can be trained in psychology so that their approach to examining books and forming independent conclusions produces a more successful audit. Audits require accountants to balance human behavior with financial transactions, and many of the newest theories and practices pairing audits as they relate to psychological approaches are regularly published in the “Journal of Accounting Research.” Standard research techniques used during these audits are observation, theory development, background collection and hypothesis testing that often changes the accountant's role from figure collector and analyst to independent investigative researcher, probing beyond the books. Taxes Understanding the personalities of folks for whom accountants do tax returns is another aspect of psychology education that’s important, even for those who do nothing but prepare tax returns. Knowing a client’s personality can help an accountant do his job more efficiently.

The Investors One interesting demographic recognized within the accounting psychology field focuses on the behaviors of investors. High-risk takers often give their accountants a particularly difficult time because they tend to be overly confident, may lack self-control and often have a propensity for “memory loss” following financial failures. Additionally, people falling into this category tend to be reticent about disclosing the information an accountant needs to do her job, so the more training in psychology an accountant receives, the better able she is to do her job and manage her client as well....