Thursday, March 25, 2010

Role of accounting in business decision

Knowledge of the past performance of an enterprise is of additional value beyond its historical aspects; it is useful in planning future operations. By comparing summaries of the most recent month with the preceding moth and with the comparable month of the preceding year, trends become apparent. Further study and analysis may develop the contributory cause of the trend and point the way to accelerating those that are favorable and to halting those that are undesirable. For example, and increase in the volume of services or merchandise sold is a favorable indication. If the increase is accompanied by increases in cost and expense of such magnitude that net profit in decreased, the end result is, of course, unfavorable. Questions such as the following should be answered : was the increased volume of sales attributable to excessive reductions in selling price. Did the cost of the merchandise increase without a comparable adjustment in selling price? What type of expenses increased and that were the causes of the increases? Which of the increase were unavoidable and which one can be reduced in the future without adverse effects?
A business that is contemplating expansions needs to give careful consideration to the probable effect of the added facilities on the future volume of business and expense. With the return on the additional investment justify the expansion? There may also be problems of financing. If money is to be borrowed, when can it be repaid? These are illustrations o the money problems that constantly confront owner and managers in planning future operations. Business records do not supply all of the answer, nor do they take the place of good judgment. The data obtainable form the records are essential however, as a partial basis for making decision.
There are many other needs of a more routine nature served by record. For example, it is necessary to know the amount owned to each creditor and by each customer and the date each payment is due. Records of property are necessary in determining the amount and type of insurance that should be carried and in ascertaining the amount of any insured loss that may occur. Knowing when to place orders for merchandise and supplies, granting credit to customers, anticipating the amount of cash required at any particular time-theses and many other essential items of information can be obtained in a timely and orderly fashion only if adequate records are maintained.
In addition to manage and owner, there are others who must be supplied with reports based on the business records. Banks customarily require periodic financial statements form businesses that owe them money. It is customary to submit annual reports to parties from whom long term loans have been obtained. Various departments of Government require reports on property, production, foreign exchange earnings, labor welfare, etc. for obtaining permission to issue debentures; a company is required to file detailed reports on business operations and financial position with government agencies. A stock exchange also requires periodic reports from companies whose shares are listed. The forgoing reasons for preparing accounting reports for outsiders are merely illustrative; there are many others.
Thus far attention has been focused on business enterprises. Records are also needed by those engaged in professional pursuits and even by persons who have retired from active participation in a business or profession. Government and semi-Government units must maintain records of their transactions as they are required to report to higher authorities. Records of the past performance also serve as background in the planning for the future. For similar reason, hospitals, educational institutions, labor unions, and other organizations must maintain records and report on their financial transactions.

1 comments:

jack smith said...

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