Relationship between Accounting Information and Decision Making Process

What is Accounting Information?

Accounting information refers to the data regarding a transaction taking place in a business entity. Accounting is the method or process of identifying the data, then recording it for using it to generate reports and analysis for an array of users. Anything pertaining to business operations is translated into accounting information, be it buying a machinery or maintaining the inventory.

The accounting information is used by both internal as well as external users. Internal users comprise of owners, managers and employees. On the other hand, external users are the customers, bank, suppliers, potential investors, tax authorities.

Accounting information is of crucial importance to the Stakeholders, Shareholders, Managers, Government.

The accounting information comprises of few elements to make the transactions more comprehensive. The accounting equation is made up of three basic elements viz. assets, liabilities and equities. These three elements combine in an equation to show that assets are equal to liabilities plus equities. Like all the equations wherein elements on the left hand side i.e. assets in this case should be equal to elements on the right hand side i.e. Liabilities and equities.

For instance, if your business buys inventory via cash transaction then the cash asset is reduced to increase the inventory asset. However, if the inventory is bought on credit then the liabilities increase resulting in increased account payable.

There are three major financial statements viz Income statement, balance sheet, cash flow which help in carrying out the desired financial analysis. An income statement gives an overview of all the incomes and expenditures. The balance sheet focuses on computing assets and liabilities. The cash flow statement emphasises on the movement of cash in various business transactions. It breaks down the movement of cash into different activities such as investing, operating and financing.

Purpose and Importance of Accounting Information

The major purpose of accounting information is to collect, zero down and report on the information particularly the financial aspect, financial position and cash flow of the business. The information retrieved helps in taking the required decisions with respect to business’ growth, management, investment and lending.

Accounting information is of vital importance to its users as a lot depends on its accuracy. Thus it is of utmost importance to capture the realities of business operations to help the business prosper in the long-run. Correct accounting information helps business to decide the strategies to be adopted to help business prosper and increase its market share.

Accounting information has different meaning to its stakeholders and shareholders. For managers accounting information should provide precise data so that they can easily determine and forecast potential results for different business actions. Employees rely on accounting information to understand how well is the organisation performing and its financial stability. From investor’s point of view, they need accounting information to evaluate the different investment avenues and compare business to other business. In context to suppliers and creditors the financial information helps them to analyse if business is using credit , how credible is the organisation.

The other type of accounting information comprises of tax accounting and non-profit accounting. For tax accounting, we often hear the term reconciling book to tax. This calculates the differences between what is shown in financial accounting and the results shown in tax returns. The differences occur due to different Financial Standards i.e. GAAP(Generally Accepted Accounting Principles) and IRS.

Correlation between Accounting Information and Decision-Making Process

In general, the accounting information is used for decision making. Business owners often review the accounting information to understand how well is the business operating. For instance, financial ratios use the accounting information which in turn acts as an indicator for the performance of business.

With respect to financial management, the income statement and accounting expenses help to understand the overall business scenario.

Business decisions could mean anything starting from expansion of current operations, to utilization of different resources, procurement of raw materials, machinery or estimating the future sales or analysing new business prospects.

Effective utilisation of Accounting Information

Keeping a track of the accounting information is an indispensable component to run a business successfully. Moreover, full-fledged information helps to keep a record of income and expenditures, take care of statutory conformity and help investors, government with financial information that can help in taking the most appropriate business decisions.

Thus, it is quite evident that there exists a strong relationship between the accounting information shared and decision making process.

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