“Accounting is an information system” Do you agree? Substantiate your answer with reasons. How does an accountant help in planning and controlling a large commercial organisation? Explain.
Ans. There is no doubt about the fact that accounting is an information system. The accounting information is highly useful for different groups of persons. No organisation can function with out the use of money and hence without accounting. For an organisation, accounting information is very important for its functioning. Not only the proprietors and the managers, but also the other groups of persons are interested in getting accounting information. Various groups of persons alongwith their requirement for such information are discussed below in the large organisation.
1. Proprietors: Proprietors who have invested their money in the business would certainly like to know the financial details at every point of time. Since any business is being carried out to earn profit, accounting information becomes utmost significant to understand profitability and financial soundness.
2. Managers: In case of organisations which have been managed by professional managers, requirement of watching all those parameters that can affect profits, is highly important. Generally these parameters are related to accounts and hence accounting information is of high interest to these managers. The accounting disclosures helped them in informing about what has happened and what should be done to improve the profitability and financial position of the enterprise in the period to come.
3. Creditors: Creditors are those persons from whom the company has taken loans or credit. These people are also interested to know the financial status of the company so as to know whether the company is in the position to meet its commitments towards them in regard to both payment of interest and the principal amount.
4. Government: The requirement on the part of the government to know about the financial details is due to taxation, labour and corporate laws. If government feels it important, it can examine the accounts of any organisation.
5. Prospective Investors: Prospective investors would also like to know the status of profitability and performance of a company before investing in the business. Accounting information would help them in taking decision.
6. Employees: Employees are also interested to know the financial performance of the organisation due to their interests in profit sharing and bonus schemes. If some of the employees have purchased the shares of same company, their interest would further increase.
7. Citizens: General public would like to know the accounting information of institutions such as banks, temples, utilities like transport, gas, fuel, electricity companies etc. People could be interested in government institutions also as a tax-payer and voter.
Role of Accountant in Planning and Controlling
An accountant plays a vital help in planning and controlling any organisation. As we have seen the importance of accounting information for various categories of people, the significance of work of an accountant for various functions of management is explained below:
1. Planning: The planning function of management involves defining goals and course of actions to achieve them through formulation of appropriate policies. Accounting information provides relevant data which on analyses help the manager to define goals and their course of actions to attain them. The information is highly useful for decision making for effective planning process.
2. Controlling: Management function of controlling includes evaluation of performance so as to ascertain that the course of actions is leading to the attainment of predefined goals. In case of any deviation, remedial measures could be taken due to controlling activity. The parameters of controlling are mainly related to finance and accounts. Any information from the accountant is of high value to the management since ultimate objective of any organisation is to earn maximum profit. Techniques such as budgetary control, operating statement, cash inflow etc. are utilized by the management to control the overall functioning of the organisation.
3. Coordinating: Coordinating process is one which is required to interlink different divisions of the enterprise so as to accomplish the organizational objectives as a whole. Every department has its budget and production figures which is maintained by the accountant. These statements are used to interlink various departments. For example, purchase department has to purchase raw materials for which money is allocated. Financial statement of this department would reflect the status of all purchases. It is useful for the production department to know that the material is available and production can start. Thus the financial details are used to interlink various departments.
4. Organising: Whole organisation is divided into various groups or department to organize various activities related to the attainment of its goals. These groups could be cost centres or profit centres. A sound system of internal audit for each of these centres would help in effective organising the whole organisation into a profitable establishment.
5. Motivating: Employees should be motivated so that hey carry out their work willingly keeping high morale at work. Periodical department-wise financial statements and analysis could help management to take actions to promote, demote, reward or penalize.
6. Communicating: Communication is the process of transmitting information both inside and outside the organisation. The requirement of the management in maintaining proper communication network is important particularly when accounting information needs to be communicated to all concerned such as shareholders, creditors prospective investors etc.
From the above discussion, it can be concluded that an accountant helps in planning and controlling a large commercial organisation.
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