What is the role of accounting and financial decision making in Business? Why is essential to consider accounting data in relation to other factors in other decisions in all situations.
The word accounting can firstly be defined as the collection, recording, compiling and forecasting of financial information.
There are two different strands in accounting, and these are financial accounting and management accounting. Financial accounting has information about reports of the past, it can be used by external users, it needs to be reliable, accurate and consistent, it is ruled by accounting conventions and legal requirements, and it covers the company as a whole.
Management accounting focuses on the present and the future of the company, it is purely for internal users, it is usually easy to use, relevant and up-to-date, and it covers the departments and divisions rather than the company as a whole.
The first part of accounting is the collection of the data. This data is collected from the business transactions which are the:
– Buying and selling of goods and services
– Sales invoices, purchase invoices
– Statements, credit notes
– Remittance advice notes, cheque receipts
The second part is the recording of the data. This process is done with double entry, using the accounting equation and the conventions or principles. The information is recorded in Daybooks, books of original data, sales purchase ledgers, and nominal ledgers.
The third part is the compiling of information which from various accounting books the trial balance is extracted to allow for the formation of the financial statements and therefore the ratio analysis. It uses the data to cost products and services.
Finally the final part is the forecasting, which uses historical data to draw up forecasts. It is normally in the form of budgets, variance analysis, cash flow forecasts, and break-even analysis.
So overall we can see that accounting and financial decisions play a big part and need to be put into consideration in the decision making in business. For example, the forecasting is very important to see where the company is and based on this how it feels that it will do in the future.
Accounting data is extremely important in the internally within the business as previously mentioned, and needs to be considered in relation to other factors in other decisions. When a decision needs to be made if the accounting data is not even put into consideration, then it could lead to very bad consequences. For example, if the company builds up strategies and has various aims, they may coincide with the accounting data for example; their budget does not allow them to do what they intend to do. So whenever aims and objectives are considered, the accounting data needs to be considered to see whether it is firstly possible to do any of their proposed plans.
Accounting data is also very useful for external users who may have an interest in what is happening to the company. For example, the first type of people who likely to want to know are the shareholders of the business to see how well the business is performing and whether it is still worth investing in the business. Other types of people are the government to see that accounts are done correctly and also the banks who fund the company with loans, overdrafts etc. to see where the company is going and whether it has sufficient finances to succeed. For example, a business may want to invest in something and may want the financial backing of their bank. The bank would want to see their accounting data to see whether the business is truly capable of returning the money to the bank when the bank requests it.
So overall we can get a clear picture that it is essential to consider accounting data in relation to other factors when a company is making other decisions.