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Purposes of accounting

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Shyama Shankar
Shyama Shankar

Accounting serves three primary purposes: score keeping, attention directing, and problem solving. Score keeping deals with the financial health of an enterprise by answering questions like "How are we doing?". Attention directing gives signals to decision makers about when a decision is needed, such as when actual performance deviates from budgets. Problem solving provides information to find solutions to issues, like make-or-buy decisions or whether to continue or drop product lines. Accounting accumulates data to understand organizational performance, focuses attention on deficiencies, and enables quantification of alternative solutions.

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Visit www.managementguru.net Savor the numerous articles on marketing, strategy, human resource, operations and business ethics.
Purposes of Accounting
SCORE KEEPING The score keeping function is one of the primary purposes of accounting information. It basically deals with the financial health of the enterprise. In other words, it answers: How are we doing ? Good , bad, or indifferent? Though it appears to be a simple question, a moment's reflection will show that it is not that simple. It involves answering questions such as : What is doing good? What is doing bad? Is profit earned good? If so, how much? Is it that profit alone is not sufficient?
ATTENTION DIRECTING Attention-directing is nothing but the process of giving a signal to the user of accounting information about the need to take a decision. As such the accounting information supplied arouses the user's attention to take a decision. For example, a report from an accountant comparing the actual performance data against budget data is a score- keeping record. In the hands of a decision-maker it is an attention-directing information. This would enable him to immediately focus his attention on the deviations or variances from the budgets or the plans.
PROBLEM SOLVING The problem-solving function of accounting information involves provision of such information which enables the manager to find solutions to the problems. There are many problems which accounting information could highlight and provide for their possible solutions, such as make or buy decision with respect to component, parts or products, continue or drop decisions with respect to product lines leasing or acquisition decisions with respect to assets etc.
Profit and cash balance distinguished How do we evaluate the results of a firm ? The answers could be many depending on what your interests are. But there is no difference of opinion regarding two important aspects. 1.What is the worth of the business? 2.How much does it earn? The results of-these two inquiries usually become the basis for several decision of the management and their action plans. The initiatives the management takes in connection with improving the profitability of the enterprise and its worth will, in a large measure, be a reflection of managerial effectiveness.
Purposes of accounting
SUMMARY Accounting, in its score card role, accumulates data and enables interested persons, both internal and external, to understand and take stock of the organisation's performance. In its attention-directing role accounting information, by reporting and analysing the data, focuses a manager's attention on operational deficiencies, weaknesses, threats -and opportunities. In this role accounting complements day to day operational planning and control activities. In its problem-solving role, accounting enables quantification of the different alternative solutions, their relative merits and demerits.

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Purposes of accounting

  • 1. Visit www.managementguru.net Savor the numerous articles on marketing, strategy, human resource, operations and business ethics.
  • 3. SCORE KEEPING The score keeping function is one of the primary purposes of accounting information. It basically deals with the financial health of the enterprise. In other words, it answers: How are we doing ? Good , bad, or indifferent? Though it appears to be a simple question, a moment's reflection will show that it is not that simple. It involves answering questions such as : What is doing good? What is doing bad? Is profit earned good? If so, how much? Is it that profit alone is not sufficient?
  • 4. ATTENTION DIRECTING Attention-directing is nothing but the process of giving a signal to the user of accounting information about the need to take a decision. As such the accounting information supplied arouses the user's attention to take a decision. For example, a report from an accountant comparing the actual performance data against budget data is a score- keeping record. In the hands of a decision-maker it is an attention-directing information. This would enable him to immediately focus his attention on the deviations or variances from the budgets or the plans.
  • 5. PROBLEM SOLVING The problem-solving function of accounting information involves provision of such information which enables the manager to find solutions to the problems. There are many problems which accounting information could highlight and provide for their possible solutions, such as make or buy decision with respect to component, parts or products, continue or drop decisions with respect to product lines leasing or acquisition decisions with respect to assets etc.
  • 6. Profit and cash balance distinguished How do we evaluate the results of a firm ? The answers could be many depending on what your interests are. But there is no difference of opinion regarding two important aspects. 1.What is the worth of the business? 2.How much does it earn? The results of-these two inquiries usually become the basis for several decision of the management and their action plans. The initiatives the management takes in connection with improving the profitability of the enterprise and its worth will, in a large measure, be a reflection of managerial effectiveness.
  • 8. SUMMARY Accounting, in its score card role, accumulates data and enables interested persons, both internal and external, to understand and take stock of the organisation's performance. In its attention-directing role accounting information, by reporting and analysing the data, focuses a manager's attention on operational deficiencies, weaknesses, threats -and opportunities. In this role accounting complements day to day operational planning and control activities. In its problem-solving role, accounting enables quantification of the different alternative solutions, their relative merits and demerits.

Editor's Notes

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  2. Thus, score-keeping has two aspects, one is that of keeping record of actual data on performance- a constant process of measurement and valuation. The other aspect is concerned with putting the data in relation to predetermined standards. In order to answer the question whether the performance is good, bad or indifferent we have to have a constant process of comparison against some norms, standards or benchmarks. This is achieved by preparing a series of reports based on comparison of actual data with the planned data.
  3. A whole series of actions will be triggered by this, namely, evaluation of reasons for the deviation, remedial actions to be taken, modifications in the feedback for future and so on Most of the formal reporting takes the form of annual reports. An annual report is the score card of activities for an accounting period. If properly analysed, this report can be helpful in understanding the problems of overall nature faced by the enterprise. It can also help the shareholders in assessing the actual performance of the company vis-avis their expectations.