Question

The accounting system should provide information for five broad purposes. Describe them.

Answer 1

The accounting system can be stated as the principal and the most credible-quantitative information system in nearly all the companies. This system must provide information for five broad purposes which are discussed as below:

-- Purpose 1: Formulation of the overall strategies and long range planning. It targets to develop strategies for the development of new product and investment in tangible (equipment) as well as intangible (patents, brands, or human) assets, and frequently involving into special purpose reports.

-- Purpose 2: The decisions on resource allocation such as product and customer emphasis and prices. It usually includes the reports on the profitability of products or services, customers, brand categories, distribution channels, and so on.

-- Purpose 3: Cost planning and controlling the cost of operations and activities: It targets to reduce the cost operations with proper planning. It usually includes the reports on costs, revenues, assets, and the liabilities of plants, divisions, and various other areas of responsibilities.

-- Purpose 4: Performance measurement and people evaluation: It frequently involves a comparison of actual results with planned results; and can be measured on the basis of financial or non-financial measures.

-- Purpose 5: External regulatory meets and legal reporting needs. Regulations and statutes often provide a prescriptions on the methods of accounting to be followed. Considering the financial reports that are given to the shareholders who are making decisions to hold, buy or sell company shares. These reports should be based on generally accepted accounting principles, as largely influenced by regulatory bodies.