The Importance of Accounting Decisions - Part I Articles | Accounting

Accounting decisions are usually based on three factors: people who are managing the business, external people whose money is at stake in running the business and people or organizations which indirectly impact the running of the business.

This principle applies to non-profit organizations as well. Management of a company refers to a group of people who run the business with pre-set financial and liquidity goals. When the company is large, usually management would consist of a group of people, many of whom are hired by the company to do their jobs.

The management of a company has to face some serious accounting issues like net income and whether they have achieved substantial return on their investments. Is the company rich in assets? Which is the most profitable product? All business decisions are made in a systematic and structured way. Though larger corporations need a more in-depth analysis, their accounting principles would be very similar to smaller businesses.

Financing a business:

You need financing if you want to run a business successfully. If you wish to have more information on financing of a business, go to sba.gov/financing.

Investing in a business:

Companies invest in their current assets so they can give richer returns in future.

Producing goods or services: The responsibility of product development and production of the goods which the company would sell rests with the operations and production management.

Marketing:

These professionals effectively market and promote the products which the company makes.

Managing workers:

Hiring qualified and skilled professions is the function of human resource management.

Providing information:

The information management services in a company retrieves important manufacturing, marketing, distribution and other data and passes on the information in a systematic and organized way to others in the company so that such information can be used by them in a useful manner.

The other groups of people who need accounting knowledge are those who have a direct interest in the running of the company. These people analyze the data collected and read through them to check how the company is doing financially. Businesses would normally publish their financial report which informs people regarding their achievements in terms of meeting profitability and liquidity goals. These reports not only talk about how the company performed in the present but also how it is likely to perform in the future.

Many people outside the business also study such reports.

These people are the investors and creditors. Investors are those who have invested their money in the running of the company and will claim part-ownership. These people are curious to know about the company’s past successes and failures as well as potential earnings. A complete analysis of the financial report could influence potential investors to invest their money in to the company in the future. Once they have invested, they would continue to read its financial statements.

Creditors can be companies who loan money to the company for long or short term needs or people who pay advance deposit for services expected from the company in future. The common interest of all these creditors is whether the company would be able to repay the money with accrued interest in time. So before making any lending decision, these creditors study the liquidity status, cash flow and profitability. Banks, mortgage companies and insurance companies are some examples of creditor companies.