Accounting Information on Decision Making Process
Accounting is a word by which every business organizations, establishment, firms etc, accounting terms are used by investors, bankers, management owners lawyers or accountants.
Accounting is not only concerned with making records, it is concerned with more than the records making phase, in particular. What should be the interest of any one who is dealing with accounting information is financial results, financial statement, event which warrant them and alternative open by the business for his/her accounting experiment in order to aid the management to select the best plan of action for the firm
Therefore, an accounting can be defined Bradley as “The process of identify, measuring and communicating economic information to payment informed judgment and decision by users of information”. On the other hand, it means a system of principles and techniques which permits a series of inter-related activities that form progression of steps beginning with observing them, collecting, recording, analyzing and finally communicating information to its users. Thus the accountant task is to give raw data information. Accounting information is therefore data organized for special purpose of decision making process.
Accounting also provides financial reports that are needed by outside person who invest in business units lend money to them or extents credit to them. Accounting finishes report, which are to be used by government agencies which regulated business. It helps tax authority such as the internal control, internal revenue services, determine the correct revenue collected e.g school, hospital, church or charitable organization or groups, its members and others who contribute to this purpose wants to know how the money is spent.
In summary, accounting is the set of rules and methods by which financial and economic data are collected, processed and summarized into reports that can be used in making decision.
Accounting as a word is national to every business world or name, it can never be forgotten because that is the aim of setting up a business to actualize profit and it is through that accounting as a word is involved. For a business to grow it needs adequate accounting information on decision making process .
According to “Murdick Robertal” which states that accounting information system is the net work of act of the organizational responsibilities for the information going to be obtained from transferring data for the purpose of.
i. Internal reporting to the management for the use in planning and controlling current and further operations.
ii. External reporting to stock holder government and order other external users.
Accounting system is the heart of the management information whereby cost, financial management, taxation, auditing internal and external control are interested to make relevant information available for dealing with futire prospects and environment factors.
Accounting is not an end in itself but an important information device whereby the optimum objective is in use of accounting information on through analysis and interpretation as a basis for business decisions, it function is to provide quantitative information primary financial in nature about economic entities that are intended to be useful in making quantitative choice of action that have for reaching consequences of the entity concerned.
Accounting is not only an information system but design to communicate meaningful economic information about a business, firm or an entity to the interest parties, it is also a disciple which provides is more so essential for effective planning control and decision making.
Finally, accounting objectives means or reminds us of a principal way in accounting information on decision making process which is relevant to any business name.
VALUE OF INFORMATION RELATED TO DECISION MAKING PROCESS.
WHAT IS INFORMATION?
Information is defined (as assisted in the dictionary of business and management) as that which is assigned to data by means of convention used in their representation information which consists of data that have been retrieved, processed or other wise used for information or inference purpose argument or as a basis for, forecasting and making a wise decision.
The Encyclopedia of professional states that data are mere facts and figures that have little to do with making decisions while information on the other hand are essentials materially for decision making process.
Having discuss what information is, it can now be related to the value of information on which related to decision making process.
Adequate information should also be promotion at a minimum cost. Now a question is asked? What is the optimal quantity, contents, accuracy and speed of trammility information? These alternative different cost of values and it is clear that accountants should bear in mind, that when collecting and presenting data or information.
An important factor is virtually all practically decision is the risks and uncertainty involved. This means that it is important to show effect of risk and uncertainty and the range of likely out comes.
Information for decision making must therefore be oriented before the future and invariable involves forecasting, estimating and extrapolation, information has no value to itself.
Furthermore, accounting management information should be directs its attention to problems area facilitation of the operation of management by expectation. It should be problem solving. In other future action, highlighting possible alternative solution to organization problems and aid in the establishment of best alternative accounting. Information must aid efficiency and not only must it highlights existing, deficiencies and provide the basis for appropriate actions, it must faster the interest of the business organization by re-community changes for the improvement of the business plans, policies, procedures and various phases of business operations. Accounting information should be of assistance in estimating the future earning potential of the firms and it should generally disclose information relevance to the user of the financial statement.
Besides the desirable objectives, accounting information must also be timely because without the quality desired information because ancient history by as time it comes to the manager, clerk, indeed accounting information is news, if it is not timely present than it’s value doctorates.
CHARACTERISTIC OF ACCOUNTING INFORMATION
For an accountant to give the true and fair view of a report of its company he has to present it in form of diagram. This diagram is presented below.
SOURCE: (Arise Warren and Phielp E. Fees principles of accounting P. 497)
RELEVANCE: It means a specific accounting action being considered by management. In applying this concept of relevance it is important to note or recognize some accounting information, that are of high degree of relevance for one to use.
TIMELINESS: It means that there is need for accounting records to contain in an accurate data of records and proper update information outdated data can lead unwise decision. In some cases time timeliness concept may require the accountant to prepare a report. On the pre-arranged scheduled such as daily weekly or monthly work. In the other cases, reports are prepared in regular bases or only when needed.
ACCUARCY: It means the need for report to be correct within a constraint of the report is vital. If the report is not precise e.g. it is inaccurate report. And inaccurate report of a customer tax payment is presented to the management, an unwise decision would be taken in order to grant a credit.
As previously indicated, the concept of accuracy must be applied within the constraints of the use to be jade of the report in other records, there are occasions when accuracy should be scarified for less precise data that are worse useful to management e.g. in planning production estimates (forecast) of more accurate data for past sales.
In addition, it should be noted that there are inherent inaccuracy accounting data that are based in estimate and approximates e.g in determining the unit of a product manufacturing or being manufactured as an estimates depreciation expenses on factory equipment used the manufacturing process must be made without this cost. The cost of other product would be limited. Usefulness in establishing the product selling price.
SCARCITY: It refers to as the need for report to be clear and understandable. Informal and contents reports that are clear and understandable will enable management to focus on significant factor in planning and controlling operations that is reports on actual are expected to analysis.
CONCISENESS: It refers to as the equipment that the report should be brief and straight to the point. Although the report must be completed and include all relevant information. The inclusion of unnecessary information wastes management time and makes it more difficult for management. Management should usually be broad in scope and present summaries of data rather than small defiles.
COST BENEFIT BALANCE
The characteristics of managerial accounting report/information provide generally guideline for their preparation of report to meet the various needs of management. In applying these guidelines. Consideration must be given to the specific needs of manager and the reports. In preparing reports cost are incurred and a primary consideration is that the value of the management report must at least be equal to the cost of producing them. This covering cost benefit evaluation must be considered, no matter how information report may be. Therefore a report should not be prepared if its cost exceeds the benefit derived by users.
USERS OF ACCOUNTING INFORMATION
Various individuals and institution use the economic data that are gathered and communicated by the accounting system for assistance in making decision regarding future actions, for instance investor in a business enterprise needs information on the financial condition and result of operations of the enterprise in other to asses the profitability and risk of their investment in the enterprises. Bankers and suppliers need accounting information with which to appraises the asses the risk involved in making loans and granting credit. Lending loans and granting credit to government agencies are concerned with the financial activities of the business organization for purpose of taxation and regulation. Employer and their union representative are vitally interested in the stability and probability of the organization that hire them.
The independent individual whoa re must involved with the end of product of accounting are those charged with the responsibility of directing the operation of the enterprises. They are of term referred to as management managers relay upon accounting current operation.
Diagrammatically illustration of the process of producing accounting information to users are as follows.
From the above diagram it is clear that accounting is a language which communicates financial information to people who have an interest in organizational, managers, shareholder and potential investors, employees, creditors and the government managers require accounting information which would assist them in their decision making and control activities for examples, information needed on the estimated selling prices, costs demand competitive position and profitability or various products which are made by the organizational shareholders, requires accounting information on the value of the investment of the income which derived from their shareholding. Employees required accounting information on the ability of the firm to meet wages demand and avoid redundancies credit and provides of loan capital require accounting information on a firm’s ability to meet its financial obligations.
Government agencies like the statistical officers collect accounting information and need such information for the details of sales activities, profits investment, stock, dividend paid, the proportion of profit absorbed by taxation and so on in addition the inland revenue needs accountants information taxation. All these information are important for determining policies to manage the economy.
Accounting information is not confined to business organization above, accounting information for the individual is also important for instance, credit will only be extended to an individual after the portative borrower has finished a reasonable accounting for his private financial affairs. Non profitable organization such as churches, charitable organization, club and government units such as local authorities also require accounting information for decision making and for reporting a result of their activities. For instance a sport club will require information on the costs of undertaking the various activities so that decision will be made on resources which must be raised to financial them.
An examination of a various users of accounting information indicates that they can be sub-divided into two categories.
1. Internal parties – within the organization
2. External parties/users outside the organization.
The above categorization of users into internal and external users presuppose that they need the information for different purposes. Thus the kinds of accounting information has need for a different one.
In fact, accounting information system is one of the largest information system in most organization.
2.8 TOOL OF ACCOUNTING INFORMATION
There are various tools for accounting used for information process in decision making process which are used as link to communicate.
There is need to review the tolls of accounting information which are as follows
1. Structuring management accounting information
2. Classifying costs
3. Expressing information in equation form
4. Expressing information in graph form
All these tools review are made to attain goals and objectives, the information provided by the accountant for manager by the accounting system must be designed to help them reach their goals. The first tool, therefore inloves the recognition that management accounting in formation can and should instructured in terms of comparing some standard, budget or objectives. When the accountant or manager master this tool, this key idea, he recognizes that the decision process must some how take on this structured of evaluating information against a standard before a decision can be made. Obviously, data are unless without a standard to compare them against.
These tools are therefore for availability of fore crust and ability of the analyst, whether the accountant or a manager to structure accounting information in terms of comparison relevant information terms of decision to attain certain standards or objectives.
KINDS OF ACCOUNTING TOOLS
There are functions, sources to utilize, vases of accounting that are financial balanced, it has various types example
i. Financial management accounting
ii. Tax accounting
iii. Auditing etc. are dealing with this comparative analysis is in terms of
a. Underlying authority
b. Method of gathering data
c. Purpose of report
d. Time period covered by the report
e. Form of final report
f. Receivers of the final report.
Tax accounting Financial accounting Auditing Cost and management accounting
UNDERLYING Tax acts decree or revenue codes Generally accepted accounting principles Generally accepted accounting principle and generally accept auditing standards Cost accounting standard boards
PURPOSE Determining tax liability refund To record classify summarize & interpret organizational data or financial statement issue To express opinion, truth consistency and conformity To facilitate planning cost accumulation control and decision making
DATA COLLECTION METHOD Historical cost after the fact worksheet based on journal & ledgers Historical cost after that fact worksheet based on journals & ledgers After the fact worksheet based on records & new evidence gained in the audit Based on future current and past data.
TIME Annually/out sometimes quarterly Annually quarterly possible monthly & half year Annually & sometimes two year comparison Anytime or period as required.
FORM OF REPORT Federal & state return Balance sheet income statement fund flow statement Auditors opinion or report Budget, cost report performance report special analysis report
ROVERS OF THE REPORTS Top management internal inland Top; management public Top management members for the coy & the public Top management
FINANCIAL ACCOUNTING INFORMATION AND TOOLS
The focus of financial accounting is stewardship accounting. Financial accounting is concerned with the periodic preparation of various reports from such records. The report which may be used for general purpose or for specified purpose which provides useful information for managers, owners, creditors, government agency and the general public of a particular importance to financial accounting.
There are the principles of accounting termed generally accepted accounting among principles by outsider such as stockholder and creditors, for accurate financial statement for use in judging the performance of management accounting or corporation enterprises they must use this principle in preparing their annual reports on portability and financial statement for their stockholders and the investing public.
The end products of financial accounting information are embedded in the annual report and account. Annual account report or financial statement or profit and loss at notes on the account and other statement which are identified as being part, therefore are required by statute regulatory authorized to be included there in
ANALYSIS OF FINANCIAL STATEMENT
Analysis is the resolution of data that is necessary for control measure.
Formula: Net profit (before interest and tax
The gross profit margin: It is a measure of the efficiency of a firm ales operation with respect to the cost of goods sold. This good planning and control of cost of goods sold and mark up and margin gross sales are respectively.
Formula: Gross profit/Net sales
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