Question

Provide a discussion on how accounting information helps businesses and why is it crucial for corporations. Refer to book keeping process and tools to facilitate an analysis. Elaborate with a few examples.

Answer 1

According to the Committee of Terminology of American Institute of Certified Public Account:” Accounting is the art of recording, classifying summarizing in a significant manner and in terms of money, transaction, and events which are, in part at least of a financial character and interpreting the results thereof.”

The present age is the age of trade business and commerce. After Globalization, liberalization, and privatization, business is increasing day by day and becoming complex too. An organization cannot remember all its dealings. Therefore proper recording of business transactions is very important to carry out the business smoothly.

Accounting information provides the companies with adequate information regarding the operation of the company. Business organization often review their financial information to identify how well the organization is operating.

Following are some uses of accounting information in business:

1. Business Performance Management: Accounting information helps in measuring the performance of the company. Various financial statements and their proper analysis helps the organizations in identifying their present situation and helps them to analyze how far they are from their goal. Financial ratios helps the company in comparing their performance with other established organizations.

2. Making Business Decisions: Accounting information helps the business in taking various business decision such as expanding current operations, purchase of new equipment, estimating future sales or reviewing new business opportunities. An income statement an accounting of expense provide an important overview of the business.

Accounting information provides business information about the cost of various resources or business operations. These cost can be compared with the income of new opportunities during the financial analysis process. These process helps the business in understanding how expansion decision of the business can affect the current operation of the firm. Opportunities with low income potential and high costs are often rejected by business owners.

3. Informing Investment Decisions: Proper accounting information helps the firm in arranging funds which is required for various expansion process. Banks, lenders, venture capitalists or private investors often review a company's accounting information to review its financial health and operational profitability

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4. Create Company Budgets: Business owners often use accounting information to create budgets for the companies. Historical financial accounting information provides business owners with a detailed analysis of how their company have spent money on certain business functions. Business owners often take this accounting information and develop future budgets to ensure they have a financial road map for their businesses. These budgets can also be adjusted based on current accounting information to ensure a business owner does not restrict spending on critical economic resources.
5. It Ensures Statutory Compliance: Laws and regulations vary from place to place, but proper accounting systems and processes will help to ensure statutory compliance when it comes to the business. The accounting function will ensure that liabilities such as sales tax, income tax, and pension funds, to name a few, are appropriately addressed.

Thus from the above discussion it is being clear that accounting information play a crucial role in tracking income and expenditures, ensure statutory compliance, and provide investors, management, and government with quantitative financial information which can be used in making business decisions.

Even the key financial statement are of great use to the Business:

• The income statement provides with information about the profit and loss
• The balance sheet gives a clear picture on the financial position of the business on a particular date.
• The cash flow statement is a bridge between the income statement and balance sheet and reports the cash generated and spent during a specific period of time.