Accounting Information and Decision Making - Term Paper Example

Accounting Information and Decision Making Accounting Information and Decision Making Management has always had a basic function inhuman communal settings. The effectiveness of an organization relies on the nature of its managerial procedure. Such effectiveness demands exemplary management that interprets to competence and logical decisions. accounting can assist decision-making processes and managerial operations. The goal of an accounting framework is to offer financial data about the studied organization. This data is normally about the financial status and productivity of the organization. It is essential for an organization to understand its precise financial status to make sound executive decisions and realize its goals. This is normally achievable through the comparison of the organization with rival firms in the same sector or market. Accounting information facilitates this comparison. The following paper is a collection of theoretical knowledge on accounting information and decision-making for the reader’s basic insight, its definition, and history. The paper will further discuss and analyze the gathered literature in detail and develop a personal conclusion on the relationship between accounting information and decision-making. Literature Review History The earliest possible application of organized recordkeeping in human history goes back thousands of years to early Mesopotamia, which is Iraq today. Archeologists and historians found shelved records of supplied farm produce. Using accounting to keep a record of many dealings enabled improved trade amongst persons and assisted the advancement of more complicated communities. After Mesopotamia, Luca Pacioli possibly pioneered the earliest official literary work of accounting with arithmetic concepts in 1494. Pacioli, a monk and mathematician from Italy defined the double entry system by shedding light on the logic of bookkeeping. Pacioli theorized that one has to record all items twice but variedly, i.e. double entry. Double entry means that when one credits one item, he or she debits the corresponding one, or debits the recipient and credits the giver. During Pacioli’s era, record-keepers made entries to show statements for the enterprise instead of the owner, making annual preparation wanting. After Pacioli, a Dutchman supported the profit and loss books at annual breaks. The degree of societal and technological progress assisted the advancement of contemporary techniques of accounting. The Industrial Revolution brought about the need for sophisticated accounting techniques. The advancement of new techniques saw the separation of ownership from administration. Organizations have seen remarkable progress in accounting hypotheses and techniques since the invention of the double entry standard. Computerization further revolutionized accounting by enhancing organizational performance without changing the instrumental principles of accounting. Clearly, recordkeeping for many industries today has roots in early societies because of backgrounds in the eras of ancient kingdoms, renaissance, industrial revolutions, and dominant periodic influences. Definitions The second edition of “Financial Accounting” by David Spiceland, Wayne Thomas, and Don Herrmann defines accounting as the “language of business” (Spiceland, Thomas, and Herrmann, 2010). The chapter continues to stipulate accounting as a method of keeping records of an organization’s activities and communicating the data in these records to the respective leaders. A more official description of accounting by the same text is a series of concepts and methods used to calculate and record financial data concerning a fiscal unit. According to Spiceland, Thomas, and Herrmann, accountants largely treat this fiscal unit like a separate body. Accountants report the recorded data to a range of different sorts of stakeholders (Spiceland et al., 2010). Stakeholders may comprise of managers, directors, creditors, partners, clients, public agencies, financial reviewers, the press, suppliers, and even workers. Irrespective of the stakeholder, users of accounting information are inclined to be wary of their individual interests in the organization. Spiceland, Thomas, and Herrmann’s definitions of accounting lead them to argue that organization leaders need accounting information to make rational decisions. Stakeholders look forward to returned investments that might in fact result in deliveries like dividends from the organization (Spiceland et al., 2010). Creditors commonly worry about the organization’s ability to meet and pay back its commitments. Public agencies demand accounting information for taxing and regulation purposes. Financial reviewers use accounting information to deduce on what they base venture recommendations. Staff members and clients prefer working for and with successful organizations respectively to advance their personal careers, and frequently have bonuses or options linked to company output. Accounting data about particular organizations help fulfill stakeholders’ requirements. The variety of stakeholders produces a rational division in the field of accounting. Spiceland, Thomas, and Herrmann’s work focuses on external recordkeeping to stakeholders outside an organization (Spiceland et al., 2010). On the other hand, managerial accounting is focused mainly on presenting data for internal administration. The role played by accounting information in organizational management and employing an internal regulation structure. The suitability of accounting data with organizational requirements for data communication and regulation is worth questioning when it comes to the subject of accounting and management decision-making. According to Nicolae Virag, a system for account data is a minor system within Management Information System (MIS) (Virag, 2013). Considering accounting a data system is possibly the most recent description of accounting, at least as stated by the American Institute of Certified Public Accountants. Virag says accounting is in fact a data system (Virag, 2013). More precisely, accounting is an exercise of overall hypotheses of data in the field of efficient economic practices and makes up a chief part of the data that an accountant presents in a quantitative manner. Basic Understanding Researchers Moorthy, Voon, Samsuri, Gopalan, and Yew say an accounting system should fit when challenges are tackled according to the organization’s level of technology and expertise (Moorthy, Voon, Samsuri, Gopalan, and Yew, 2012). Accounting systems should fit with organizational culture to influence decision-making positively. This means behavioral norms and virtue systems that describe the organization should be in line with its culture. An accounting system is helpful when leaders use the data it presents proficiently during decision-making procedures. According to Moorthy, et al, accounting data makes up a vial part of the fabric of organizational life and needs regular assessment in its broader decision-making, organizational, and environmental application (Moorthy et al., 2012). Such assessment does not just rely on the purposes of such frameworks, but contingency features of the organization too. Author Cristina Elena says accounting information is effectual when the data it presents acts caters widely to the requirements of system users. Effectual data must systematically offer information that has potential implications on decision-making (Elena, 2010). The usefulness of accounting data has been a topic of research for business and social sciences scholar Elena. In her article, Elena classifies that accounting data into information that affects decision-making and mostly the goal of governing the organization and information that fosters decision-making procedures and widely used for harmonization inside a company (Elena, 2010). Incorporating accounting data brings about harmonization in a company, which consequently raises the standard of an executive decision. Elena’s study demonstrates that the usefulness of accounting data is conditional on the standard of output of the data system that can meet its users’ demands. Social sciences researcher Siyanbola reviewed accounting information as a form of support for managerial decision-making in 2012. By deploying an appraisal study design, Siyanbola used fifty employees of a regular organization as participants of the study and collected information through questionnaires (Siyanbola, 2012). The responses on these questionnaires tested four theories while reviewing the subjects’ demographics using simple percentage. Siyanbola’s first theory was that accounting information affects managerial decision. Secondly, there is a substantial connection between the view of workers and accounting data. The third hypothesis is the substantial connection between time and accounting data, and the last hypothesis was the impact of accounting data on the related organization’s performance (Siyanbola, 2012). Siyanbola’s results on his study’s results suggest the employment of qualified accountants who can present valued information and maintain accurate records of the organization’s accounts. Friederike Wall and Dorothea Greiling discovered that accounting data enables organizations to release fiscal reports on day-to-day and weekly bases. Additionally, accounting information presents helpful knowledge for observing decision-making procedures and output of the organization (Wall and Greiling, 2011). Wall and Greiling use the first part of their research as a protocol of control for governance and assessing the usefulness of the accounting data through constant observance in the second part. Both parts analyze the influences and barriers of information that leading accounting-associated methods for managing the securities of interested parties offer for executive decision-making processes. Wall and Greiling conclude that creating stakeholder value calls for a more incorporated strategy for solving the challenge of whether an organization can form or alleviate stakeholder value (Wall and Greiling, 2011). If users of accounting information within an organization are serious about stakeholder-orientation, it is time organizations focus more on associated accounting methods. Discussion and Analysis All social science and business researchers agree that accounting information plays an important role on executive decisions and company performance. Aforementioned study findings prove accounting information to be a chief force in policymaking within any organization. This force is realized by applying the quality, basic concepts of accounting fit for every organization. For any organization to achieve its goals and mission, it has to attempt to exploit accounting information to its merit since accounting understands trade the best. Before investing in any business, one should know its language to identify the most appropriate way of accomplishing the set objectives and missions. Accounting information is the best way of knowing a business’ language and deciding whether to venture into it. Fiscal reports present an outline of the most crucial fiscal accounting data. Two additional sources of data that offer vital details under an accounting system are management’s discussion and review, and note releases to the fiscal reports (Wall and Greiling, 2011). An example of these importances is the role of financial statements for companies traded publicly. Such organizations are needed to include both sources in their yearly statements, together with the fiscal reports studied by aforementioned social science and business researchers. Management’s opinions on noteworthy events, trends, and doubts concerning the organization’s activities and resources are included in the fiscal reports’ sections of discussion analysis. Note releases either shed more light on the information present in the fiscal statements or present new information. For example, it is mandatory for organizations to include total incomes in the income statement, but also frequently report incomes entered by geographic region in a note release. For stakeholders to identify successful and unsuccessful industry players, they have to consider accounting information heavily (Spiceland et al., 2010). Most first world economies are based on free markets that enable companies to rival each other and freedom of choice for consumers. The American personal computer industry has key players like Apple, Hewlett-Packard, and Lenovo. Competition in this industry helps decide their products’ prices and the amount of resources the players pour on product components, employee incomes and benefits, manufacturing and delivery services, service contracts, research and development, and other business-associated operations. Organizations clearly know they are in direct competition with rival firms, which leads them to make efforts to please their customers. Successful industry players use their assets resourcefully to maximize sales in favor of as much returns as possible. Other industry players can be either unsuccessful, stagnant, or slow on ROI. Unsuccessful players possibly provide inferior products and services or do not ensure low costs of production. Stakeholders of such organizations refrain from pouring into or loaning more resources to the business (Spiceland et al., 2010). Deciding on whether to pour more resources into an organization or refraining from venturing into it requires insight from fiscal reports, which depends on accounting information. Conclusion Accounting is the language of all businesses that helps stakeholders make well-versed decisions about any organization. All stakeholders of an organization can use accounting information to make decisions and not just major shareholders, and creditors. Successfully implanting accounting information needs a fit between three elements. The first fit is achievable with a central view within the company or understanding of the situation. Secondly, an accounting system has to fit when issues are solved accordingly, which the organization’s technology or expertise levels. The third fit is the accounting systems blend with organization’s culture, which constitutes behavioral norms and virtue systems that define it. Based on the analysis of studies conducted on the relationship between accounting information and decision-making processes, I can rightly conclude that the role of bookkeeping by accounting systems is just as important as decision-making. I believe accounting information systems serve as means of communication between internal parties of an organization and external ones through fiscal statements. References Elena, G. C. (2010). Trends of Accounting Information Use for Managerial Decisions Making. Annals of Ovidius: Economic Stint Series 2, pp. 250-4. Moorthy, M. K., Voon, O. O., Samsuri, C. A. S. B., Gopalan, M., and Yew. (2012). Application of Information Technology in Management Accounting Decision Making. International Journal of Academic Research in Business and Social Sciences2(3), pp. 1-16. Siyanbola, T. T. (2012). Accounting information as an aid to Management decision making. International Journal of Management and Social Sciences Research, 1(3), pp. 29-34. Spiceland, D., Thomas, W., and Herrmann, D. (2010). Financial Accounting, second edition. New York, NY: McGraw-Hill/Irwin. Virag, N. P. (2013). Accounting Information – Basic Support For Decision Making. Studia Universitatis Vasile Goldis Arad: Series economics, 23, pp. 73-7. Wall, F. and Greiling, D. (2011). Accounting information for managerial decision-making in shareholder management versus stakeholder management. Review of Managerial Science 5(2-3), pp. 91-135. Read More