subject: The Role Of Accounting In Business Organizations [print this page] Accounting information is used in all economic activities, form a kindergarten or a social club, through complex business organizations to national and international authorities. Accountants 'keep the score' of business events, by recording, analyzing and reporting the results for two main reasons:
1. To support (and improve) future decisions - particularly by management
2. To discharge accountability to the providers of the funds used - either higher levels of management or, externally, to investors or lenders.
In addition, financial reports are required by other users, such as the revenue departments and stock exchanges (for listed companies), and registrar of companies under the companies acts in different countries. The primary objectives of accounting information, in the two points raised above, are closely linked within a business.
Decision support: Business decisions vary from very short term, such as deciding to supply goods on credit to a customer, to very long term - for example, undertaking oil exploration in a new offshore license area. Clearly the information requirements for such decisions are very different, but both require financial information.
Increasingly, input to strategic decisions is expected from employees at all levels of a business. The 'breadth' of the transaction level base of the diagram represents the significantly greater number of decisions at this level compared with the tactical and strategic levels - where there are far fewer but more far-reaching decisions. Financial accounting information to support managerial decisions is provided by regular reports, usually monthly, that provide appropriately detailed information for the level of management concerned. One-off reports, online enquiry systems or financial models may provide other accounting information.
Accountability In addition to using accounting information, to support decisions, managers are also held accountable for the resources entrusted to them. This accountability is normally discharged by submitting financial reports showing the results achieved and the current financial position of their business unit. Accountability may be within the organization - to senior management, for example, a chief executive officer, or the board of directors. In turn, the CEO and the board will be required to report to shareholders or to a shareholding Minister of the Crown. Accountability may also be made to lenders, for example, banks under specific reporting requirements.
In large organizations, the accountability financial statements are normally prepared monthly and provide as much detail as is required by management for monitoring the operation and discharging accountability for past decisions.
In smaller businesses, financial statements may serve both the full decision-support and accountability roles, and may be formally prepared only once a year. However, even here, certain vital financial information for managing the business should be prepared at least monthly. Providing information for both decision support and accountability purposes requires accountants to do much more than merely record the 'score' - the bookkeeping function. It has required the development of many different ways of analyzing and reporting information to be meaningful to the report users. Accountants have become specialists in financial reporting, cost and management accounting and tax planning as well as in the related disciplines of financial management and auditing. The increasing need for such specialist knowledge and the reliability of the information provided by accountants has given accounting recognition as a 'profession' in modern society.
by: Rashid Javed
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