Purposes of Accounting Information

Much of the modern business management has been made possible only by
a counting information. Management is a process of converting information into
action; and accounting is a source of most of the information that is used for this
purpose.

We have already learned in the previous Unit that in accounting process, financial information i.e. information involving money matters of a business enterprise, is recorded, classified and summarized. These data on various transactions of the business entity are classified into different heads like revenue, expenditure, current assets, current liabilities, owner’s equity, fixed assets, long-term liabilities etc.
 

The classification and presentation of the data in this way enables any interested
person (manager, shareholder, creditor etc.) to analyse it for understanding and
taking stock of the organisation’s performance. This draws the attention of the
user of accounting information to take a decision. For example, the annual financial report of the company can be used by the shareholders, to assess the actual performance of the company vis-à-vis their expectations, and hence make their future investment decisions accordingly.
 

Let us take another example, where the accounting information reports a fall in
net profit of a dairy plant this year in relation to previous year’s profit and/or profits of other dairy plants. This will immediately focus the attention of manager towards the need to arrest the decline in profit and trigger a whole series of actions in this direction like evaluation of reasons for the decrease in profits, remedial decision to be taken and so on. Thus, in nutshell, accounting information serves the purpose of focusing a manager’s attention on operational deficiencies,weaknesses, the threats and opportunities of a business enterprise.
 

The role of accounting does not stop at attention directing but goes further to
enable quantification of the different alternative solutions and their relative merits and demerits. For instance, the manager in our previous example can evaluate the alternative solutions to increase profits, like, drop least profitable product line, decrease administrative expenses, increase sales revenue etc., by quantifying the effect of each of the alternatives on profits using the accounting information.

Thus, important purposes of accounting information can be summarized as keeping score of the organizations performance, attention directing of users of the information and problem solving for growth of enterprise.