“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 organization? Explain.
Accounting as an information system
Accounting is a service activity. Its function is to provide qualitative information, primarily financial in nature, about economic entities and that is intended to be useful in making economic decisions. It is universally accepted that making available the qualitative accounting information is an objective as these are the basis to make decision by its users. The accounting information is expected by its users is provided through financial statements. We can say that accounting information refers to the financial statements so generated are the Income statements, that is, profited loss profit and loss account and position statement, that is, Balance Sheet. The American Accounting Association define accounting as follows: "the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information!.
Let's look at the key words in the above definition:
- It suggests that accounting is about providing information to others. Accounting information is economic information
- it relates to the financial or economic activities of the business or organization.
- Accounting information needs to be identified and measured. This is done by way of a "set of accounts", based on a system of accounting known as double-entry bookkeeping. The accounting system identifies and records "accounting transactions".
- The "measurement" of accounting information is not a straight-forward process. It involves making judgements about the value of assets owned by a business or liabilities owed by a business. it is also about accurately measuring how much profit or loss has been made by a business in a particular period. As we will see, the measurement of accounting information often requires subjective judgement to come to a conclusion
- The definition identifies the need for accounting information to be communicated. The way in which this communication is achieved may vary. There are several forms of accounting communication (e.g. annual report and accounts, management accounting reports) each of which serve a slightly different purpose. The communication need is about understanding who needs the accounting information, and what they need to know!
The main purpose of accounting is to provide information, which is critical for the success of business organizations. Information is the data that have been put into a meaningful and useful context. System may be defined as a composite entity consisting of a number of elements, which are inter-dependent and interacting, operating together for the accomplishment of an objective. From the definition of information and system, we can understand that why accounting is also called an information system All elements of accounting work together to process different data feeded to them into a meaningful presentation, which is also called information.
How accounting information helps businesses be accountable
• Accounting is essentially an "information process" that serves several purposes:
• Providing a record of assets owned, amounts owed to others and monies invested;
• Providing reports showing the financial position of an organization and the profitability of its operations
• Helps management actually manage the organization
• Provides a way of measuring an organization’s effectiveness (and that of its separate parts and management)
• Helps stakeholders monitor an organizations activities and performance
• Enables potential investors or founders to evaluate an organization and make decisions
Accountants focus on the needs of decision makers who use financial information, whether those decision makers are inside or outside a business or other economic entity. Accountants provide a vital service by supplying the information decision makers need to make “reasoned choices among alternative uses of scarce resources in the conduct of business and economic activities.”
The accounting helps the management in planning and controlling the organization in the following ways:
Planning: One of the key features of management accounting is its focus on future events.
In most companies historic information will be of only limited value in evaluating major operational changes and new strategic directions. Management accounting has an important role to play in providing support for planning by ensuring that all subsidiary activities are co-ordinated into one master plan with quantified objectives. A detailed budget will then be prepared to guide the company through the next 12 months.
For this purpose accountant would be able to collect the necessary information and make necessary estimates.
Decision-making: Management accountants do not actually make decisions — outside of their own function — but they do have an important role to play in providing relevant information to allow other managers to solve problems in the most effective way. Within the context of the overall process of analysis, planning and control, the management accountant’s role in providing information can be summarized as follows:
• identify the problem and define the objectives of a solution; e.g., improve efficiency by reducing consumption of materials;
• search for alternative courses of action; e.g. change production method, alter product specification, change supplier or materials in specification, etc.;
• collect data about the possible courses of action; e.g., equipment costs, running costs, potential cost savings, customer reaction, etc.;
• select the appropriate course of action after evaluation of the alternatives; for example, revised product costings, cost volume profit analysis, cost/benefit analysis, discounted cash flow, etc.
Controlling: While the management accountant would not normally have executive control over the day-to-day running of the factory, they would, nevertheless, have an important role to play in the design and maintenance of the mechanisms for monitoring and controlling activity. By comparing planned activity targets with actual performance, the management accountant would identify variances, undertake further investigation and then suggest possible remedial action to management. In most businesses, (with exceptions such as processing gold bullion, etc.) it is not sufficient to simply say that everything must be measured, accounted for and controlled. If the function of management accounting is to add value to the business, then the level of control, and the analysis involved, must be cost-effective in relation to the potential benefits of the investigation. Furthermore, information must be communicated to the appropriate level of management in a readily understandable form.
Posts
