Accounting information and its applications

Accounting developed as a system for reporting information to the owners including the shareholders and other investors of the business. In the process of its evolution, accounting has branched off into two distinct directions – one dealing with information processing for external uses and the other dealing with information processing for internal (or managerial) uses. One is referred to as financial accounting and the other one is called as managerial accounting. As far as accounting information is concerned it can be looked in a broader sense to encompass the information processing for both internal and external uses.

Purpose of accounting information:

Accounting information is useful for (1) score keeping; 2) attention directing and 3) problem solving. For this purpose the accountant is in a position to provide necessary information. Obviously, the type coverage of information necessary may vary from organization to organization. The specific information needs in the actual decision making process at different organizational levels influence the scope of an accounting information system.

Score keeping: The score keeping function is one of the primary purpose of accounting information. It basically deals with the financial health of the enterprise. In other words, it answers: How we are doing? Though it appears to be a simple question, a moment’s reflection will show that it is not that simple. It involves answering questions such as: Whether the unit functions satisfactorily? Is profit generated is up to the mark? Is it necessary that further steps are to be taken for improving the profit base? Thus score keeping has two aspects; one is that of keeping record of actual data on performance – a constant process of measurement and valuation. The other aspect is concerned with putting the data in relation to predetermined standards. In order to answer the question whether the performance is good, bad or indifferent we should have constant process of comparison against some norms, standards or benchmarks. This is achieved by preparing a series of reports based on comparison of actual data with the planned data.

Attention directing: Attention directing is nothing but the process of giving a signal to the user of accounting information about the need to take a decision. As such the accounting information supplied arouses the user’s attention to take decision. For example, a report from an accountant comparing the actual performance data against the budget data is a score keeping record. In the hands of a decision maker it is attention directing information. This would enable him to immediately focus his attention on the deviations or variances from the budgets or the plans. A whole series of actions will be triggered by this namely, evaluation of reasons for the deviations, remedial actions to be taken, modification in the feedback for future and so on.

Problem solving: The problem solving function of accounting information involves provision of such information which enables the manager to find solutions to the problems. There are many problems which accounting information could highlight and provide for their possible solutions, such as make or buy decisions with respect to components, parts or products, continue or drop decisions with respect to product lines; leasing or acquisition decisions with respect to assets etc. Problem solving is therefore an important purpose of accounting information system.