Introduction
Commercial activities normally take place because investors see a chance to generate profits in them. Basically in a free market economy organizations freely enter and exit markets. Moreover, investors are attracted by ventures which yield high profits. In some situation, investors who find themselves in ventures which are generating low profits tend to get out of them (Weitzman M, 2003). The current world economy is fast changing due to changes in technology and many other factors. This has in turn imposed pressure on organizations to transform to remain competitive (Weitzman M, 2003). This as in effect made the accounting information a very important tool in assisting the organization in navigating certain environments.
When investors are making a decision they need clear information of the underlying economic situation both in terms of the economic situation and in specifics of the certain ventures (Moss et al, 2002). Fundamentally, for an organization to remain profitable it must be aware of the characteristics of a particular market in which it trades. Further, these organizations should be aware of expenditures as well as the current and future pricing of their products and/or services (Weitzman M, 2003). This information is normally provided in records or accounts of historical transactions in the organization are engaged (Moss et al, 2002). Without such records, it could be difficult to make an effective decision.
Often organization decision involves choices between possible alternative courses of action which are subject to constraints of various kinds (Jackson D, 2000). To make effective decisions these alternatives have to e evaluated. Moreover, the decision so reached must be monitored to establish its compliance with what was expected in the plan (Jackson D, 2000). This because monitoring offers insights into what went wrong and how to modify it.
Organization decisions which can be based on accounting information may include, how much of the product to sell, how much to charge for a product or a service, whether to take over other alternative activity or to shut down the business (Vaassen, 2002). They may also include whether to invest in a specific piece of equipment, choosing between alternative ways of manufacturing something, as well as how to spend on research and development (Vaassen, 2002)
Ventures which have a higher degree of risks achieve a higher return (Weitzman M, 2003). This effect encourages investors to take higher risks ventures with the hope of achieving high rates of returns. Accounting information provides information that is very significant to those who directly or indirectly interact with the organization (Economic Report, 2000). This is because it allows for the assessment of the performance of the managers as well as the performance and standing of the organization itself (Jackson D, 2000). This in essence facilitates the organization managers in making more effective decisions concerning the organization.
Recent research efforts indicate that accounting information is increasingly being accepted as an aid in making organizational decisions (Vaassen, 2002). This has led many organizations to regard accounting information as a procedure of identifying, measuring, and communicating economic decisions to allow informed judgment or decision (Jackson D, 2000). Accounting information is utilized by the user to make data-based decisions. These decisions impact the running of the organization positively or negatively.
The main objective of accounting information is to help organization leaders make information-based decisions. Organization owners utilize accounting information to make investment decisions as well as stewardship decisions (Vaassen, 2002). The primary concern of investment decisions is to create wealth for the owner. Therefore the owner uses accounting information to increase his/her wealth. Moreover, the investors may utilize accounting to assess how the firm is generating profits as well as prospects (Moss et al, 2002). Additionally, investors use accounting information to access the degree of risks related to their investment in the organization (Moss et al, 2002). Accounting information related to risks and returns can be very useful when deciding whether to sell or hold an ownership interest in an organization (Weitzman M, 2003).
In large organizations, investors are generally not involved in the running of the organization. On their behalf, these organizations are run by managers. The managers are expected to run the organization in the interest of the owner. This sometimes can result in conflicts between the owners and the managers. Accounting information assists both parties in their conflict resolution process by revealing how the resources have been utilized (Jackson D, 2000). This information is used by investors either to reward or fire such managers.
The government may require organizations to account for reasons such as taxation, economic management as well as government contracts (Economic Report, 2000). Many country’s government’s tax organizations based on their accounting profits. The government uses accounting information to establish how much to tax a given organization. The government also requires this information to establish whether policies encouraging greater competition are complied with (Economic Report, 2000).
The management of any organization requires accounting information more than any other stakeholder of an organization. This is because the management is obliged to plan every activity of the organization (Vaassen, 2002).). Management requires forecast information to access the likely result of the utilization of a given policy. Moreover, the forecast information is also significant in identifying future challenges and opportunities of the organization (Weitzman M, 2003). For instance, the management may endeavor to ensure that the actual results coincide with expected results. Further, the management use accounting information to establish to which extent does the actual performance coincides with planned to establish deviation (Moss et al, 2002). It can therefore be concluded that since management has to plan and run the organization, the accounting information in a broad range to run the organization effectively.
References
Weitzman, Martin L (2003) Income, Wealth and the Maximum Principle. Harvard University Press.
Moss, David A, and Sarah Brennan (2002) Economic Accounting: Past, Present, Future. Harvard University Press
Economic Report of the President 2000, Washington DC Jackson, Dudley (2000) The new National Accounts. Edward Elgar
E.H.J Vaassen (2002) Accounting Information Systems: A Managerial Approach. Maastricht University