Question

‏Advantage of Better management decision in accounting

Answer 1

Accounting is the science of recording and classifying business transactions and events, primarily of a financial character and the art of making significant summaries, analysis and interpretations of these transactions and events and communicating results to persons who must take decisions or form judgement.

Accounting has various advantages but none of it is possible with better management decision :

1. Complete and Systematic Record:
Accounting is based on generally accepted principles and a scientific way of presentation of business transactions in books of accounts.With better management decision a firm can take correct decisions at correct point of time for eg. What sort of accounting system should a firm follow for best profits. Whether they should follow cash accountingmethod or accrual accounting. Which depreciation method to follow. All these systematic recording of data and complete understanding of accounting principles is possible only with better management decisions

2. Determination of Selling Price:
Accounting helps and guides the management to take decisions in respect of determining selling price, deduction of cost, increase in sales etc.

3. Valuation of the Business:
In case of sale of business or conversion of one business into another, true and fair value of the business is calculated. Through better management decision, the correct picture can be depicted in Balance Sheet and as such the purchase price can be determined.

4. Helps in Raising Loan:
For further expansion, business must have sufficient funds. Sometimes, due to paucity of funds business cannot do well. In those cases further funds can be raised by taking loan from some financial institutions like banks, financial institutions etc. These financial institutions lend money on the basis of profitability and soundness of the business enterprise. The profitability and soundness can be measured by the Trading and Profit & Loss Account and Balance Sheet, the final results of books of accounts.

5. In Compliance of Law:
Every business has to deal with various government departments like income tax, sales tax, custom and excise etc. Various periodic returns are to be filed with these departments. With effective management a firm will be in compliance with all these filings and will never face any scrutiny in face of law

6. Effective Management:
Accounting facilitates proper feed back to the management. As such, it helps the management in planning as well as control of different activities of the business enterprise. It also helps the management to evaluate the performance of the business enterprise and takes timely action to remove the shortcomings in the management.