Importance of Accounting in Management Decision Making

Importance of Accounting in Business OrganizationTo run a business you need data, records, reports, analysis, accurate information about assets, debts, liabilities, profits; and that is why Accounting is Importance for any business activities.

The accounting information is very important for the management or the decision making the body of an organization.

Management cannot decide without reasonable information for backing it up.

To make a decision, it has to be based on genuine facts and figures. For deciding every level of management, information is crucial.

Accounting gives management information regarding the financial position of the business, such as; profit and loss, cost and earnings, liabilities and assets, etc.

That is why the importance of accounting in business is very large.

For making the right decision, Management depends on statistical data and information that accounting provides.

The main object of Accounting is to record financial transactions systematically in the books of accounts and to find out the profit-loss and financial position of a business.

Ascertainment of profit-loss and financial position, interpretation and analysis of accounts and statements, development of accounting system, a collection of statistical and economic data, formulation of financial principles and financial planning and controlling results as per plan, etc. are the main functions of Accounting.

In the modem age, Accounting is directly related to financial management.

Due to entity concept and management, joint-stock Company, developed means of communication and international business, etc. scopes of business have so much expanded that the management is to depend on various accounting data and information for taking various decisions.

Accounting prevents the misuse of assets, increases production and profit, controls costs and helps increase the efficiency of the overall management.

The role of management is very important in the overall development of a business organization.

The functions of management are planning, organizing, collecting business elements, motivating, coordinating, controlling and budgeting, etc. Successful completion of these functions of management depends on an efficient accounting system.

Accounting is a continuous system that shows the financial position of a business entity by identifying the economic events and recording, analyzing and presenting them.

Accounting gives information about the economic entity’s financial position.

Importance of Accounting in parts of Business are described below;

Importance of Accounting in Planning

Proper planning is very much needed for the successful completion of various management activities.

This planning’s cash planning, sales planning, procurement planning, determining the quantity of stock, development planning, fixing up target-profit, etc. are very much dependent on accounting data and information.

Accounting Importance in Organization

Accounting plays a very vital role in the proper execution of the important functions of the management organization.

Accounting helps management-organization by providing information like percentage of profit over the capital, capital investment position, management efficiency in controlling, etc.

Accounting Importance for Motivation

Labor-employees are to be motivated for achieving expected performance. Financial reward is one of the main motivating factors of work.

The management is to be aware of the financial position of the business for providing financial benefits. Accounting helps management by providing necessary information for making proper decisions.

Accounting Importance for Co-ordination

One of the main functions of management is to achieve the final target of the business by coordinating various activities of different departments. Accounting helps in coordinating various activities of different departments of the business.

It also helps the management in the adjustment of purchase with sales, an expenditure with income, sales with debt receivable realization, etc. to a great extent.

Accounting Importance in Control

The main functions of modem management are planning and controlling.

Controlling is essential for the completion of activities according to the plan. Accounting can help management much in control.

Accounting Importance Media of Communication

Accounting plays a vital role as a media in communicating various information from different departments, business, and management plan of actions to various departments.

For instance, in the modem age; accounting is regarded as the best media of communication in supplying information to management regarding purchase and stock, time of purchase, cost of purchase and sales price, etc.

Besides, the function of Accounting is to collect and provide information about the business to various interested parties.

Accounting Importance in Budgeting

The preparation of various budgets is essential to run the business successfully. The historical information which is needed in the preparation of the budget is supplied by Accounting.

Accounting Importance in Professional Advice

An efficient and honest accountant helps the management with valuable professional advice for the development of its business. In the modem age with the complexities of business management has also become complex.

In this aspect, the role of accounting is very important. The efficiency of management depends on the efficient use of accounting data and information. In the developed countries accountants are regarded as efficient and successful managers.

In the modem age, in big organizations accountants are included in the management committee. It can be said that Accounting and Management are interdependent. Accounting is an essential tool for management.

Management is universal.

It is required at every step of an organization. And accounting information is very required for management. Accounting aids management in planning, organization, motivation, coordination control, budgeting.

Accounting delivers the financial and economic information that an organization managing process is needed. Management is the internal use of accounting information.

It this competitive business world management has to be swift and dexterous in its decision making.

Accounting gives information that enables the management to make important decisions for the business. Accounting is an important tool for management as it’s regarded as the “Language of Business”.

Work of Accountants in Accounting and Accountant’s role in decision-making

Accountants help entities be successful, ethical, responsible participants in society. Their major activities include observation, measurement, and communication.

These activities are analytical and draw on several other disciplines (e.g., economics, mathematics, statistics, behavioral science, law, history, and language/communication).

Accountants identify, analyze. record, and accumulate tacts, estimates, forecasts, and other data about the unit’s privities; then they translate these data into information that can be useful, for a specific purpose.

Accountants design and maintain accounting systems, an entity’s central information system. to help control and provide a record of the entity’s activities. resources, and obligation Such systems also facilitate reporting on all or part of the entity’s accomplishments for some time and on its status at a given point in time.

An organization’s accounting system provides information that;

  1. helps managers make decisions about assembling resources. controlling, and organizing financing and operating activities; and
  2. aids other users (employees, investors, creditors. and others—usually ‘ called ’ stakeholders) in making investment credit, and other decisions.

The accounting system must also provide internal controls to ensure that

  1. laws and enterprise policies are properly implemented;
  2. accounting records are accurate;
  3. enterprise assets are used effective (e.g., that idle cash balance are being invested to earn returns);
  4. steps are taken to reduce the chances of losing assets or incurring liabilities from fraudulent or similar activities, such as the carelessness or dishonesty of employees, customers. or suppliers. Many of these controls are simple (e.g.. the prenumbering of documents and accounting for all numbers; others require division of duties among employees to separate record keeping and custodial tasks to reduce opportunities for falsification of records and thefts or misappropriation of assets.

All enterprise’s system of internal controls usually includes an internal auditing function and personnel to ensure that prescribed data handling and asset/liability protection procedures are being followed.

The internal auditor uses a variety of approaches, including observation of current activities, an examination of past transactions, and simulation often using sample or fictitious transactions to test the accuracy and reliability of the system.

Accountants may also be responsible for preparing several types of documents.

Many of these (e.g.. employees’ salary and wage records) also serve as inputs for the accounting system, but many are needed to satisfy other reporting requirements (e.g., employee salary records may be needed to support employee claims for pensions).

Accountants also provide data for completing income tax returns. Accountants have a major role in providing information for making economic and financial decisions.

Rational decisions are usually based on analyses and comparisons of estimates, which in turn, are based on accounting and other data that project future results from alternative courses of action.

External or financial accounting, reporting, and auditing are directly involved in providing information for the decisions of investors and creditors that help the capital markets to efficiently and effectively allocate resources to enterprises; internal, managerial, or management accounting is responsible for providing information and input to help managers make decisions on the efficient and effective use of enterprise resources.

The accounting information used in making decisions within an enterprise is not subject to governmental or other external regulation, so any rules and constraints are largely self-imposed.

As a result, in developing the data and information that are relevant for decisions within the enterprise, managerial accountants are constrained largely by cost-benefit considerations and their ingenuity and ability to predict future conditions and events.

If the entity is a state or local governmental unit, it is subject to the reporting standards and requirements of the Government Accounting Standards Board.

If the entity is private and not a profit-seeking unit, it is subject to various reporting and other regulations, including those of the Internal Revenue Service, which approves its tax status and with which it must file reports.

Uses of Accounting Information for Decision Making

The information developed by the accountant’s information system can be useful to:

  • Managers in planning, controlling, and evaluating their organization’s activities.
  • Owners, directors, and others in evaluating the performance of the organization and determining operating, compensation, and other policies.
  • Union, governmental, regulatory, taxing, environmental, and other entities in evaluating whether the organization. is conforming with applicable contracts, rules, laws, and public policies and/or whether changes are needed.
  • Existing and potential owners, lenders, employees, customers, and suppliers in evaluating their current and future commitments to the organization.
  • Accounting researchers, security analysts, security brokers and dealers, mutual-fund managers, and others in their analyses and evaluations of enterprises, capital markets, and/or investors.

To understand the better about the uses of accounting information; read our article on “Users of Accounting Information” where we explained both Internal and External Users of accounting information and showed how each user interacts with it.

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