Key components of accounting information

In an efficient organisation, monitoring is continual. To do this financial information must be recorded accurately and be ready available, so that business managers can make decisions and take steps to ensure that their organisation is working towards its targets. Such information will be available to business managers from the following sources:

Forecasts: expectations of future costs, production levels, sales, stocks, input requirements, cash inflows and outflows, and profits

Operating budgets: used to plan the day-to-day use of resources in an organisation. The operating budget will show expenditures and receipts agreed by business managers as required to meet set targets. Budgets will be prepared for all key areas of business activity: output, sales, inputs of labour and materials, overhead expenses, cash inflows and outflows

The master budget: a summary of total expenditure and expected receipts across the entire organisation

Aged creditors reports: lists of suppliers to whom the organisation owes money for goods and services delivered, with details of when each debt is due to be repaid

Aged debtors reports: lists of customers who owe the organisation money, and how long each debt has been outstanding

Balance sheet: showing the assets and liabilities of a business at the end of each trading period

Profit and loss statement: a summary of all the financial transactions undertaken by a business within a trading period. It records total revenue and expenditure, and shows profit or loss.

Cash flow statement: a summary of total cash inflows and outflows at the end of each trading period

Accounting information from the previous years trading against which changes in performance can be judged

Who uses information on business performance?

A variety of people and organisations will wish to use data to monitor business performance:

Business owners will want to see the accounts in order to know how well the firm is doing, how much profit is being made, and how much their investment in the firm is worth.

Employees and Trade Unions may use published account to determine target pay settlements. If the accounts reveal that the company has gained a significant increase in profits, then employees may feel justified in asking for a large increase in their pay.

Potential future investors, including individuals and other organisations, will wish to see accounts in order to judge whether to invest in the company. Accounts allow investors to compare the performance of different companies over time.

Providers of finance, such as banks and building societies, will wish to know the financial health of a business organisation before lending it money.

Competing firms will want to assess the financial strength and efficiency of a rival company by looking at its published accounts.

The Inland Revenue will wish to see accounts to calculate how much tax the firm should pay on any profit. All businesses are required by law to reveal any profit or loss they have made at the end of each financial year for this purpose.

Suppliers of materials to the firm will wish to see accounts before granting it credit, in order to judge if it will be able to pay invoices.

Business managers will use accounting records to control the business. This can be done by setting performance targets and then monitoring financial performance to see if the outcomes match expectations. For example, managers might set a target for profit before tax to rise by 10% over a 12-month period. The actual percentage change in profit each week or month can then be compared to the 10% target. Accounts will provide a picture of the performance of a firm over time.

Business managers can make use of two important techniques to moni­tor the performance of their organisation using financial information. These are:

Variance analysis: this involves examining reasons for differences between business budget plans or forecasts and actual results.

Ratio analysis: this involves comparing key financial figures from the final accounts.

These techniques are considered in detail in the following sections.

Дата добавления: 2015-12-08