Accounting is part of an organisation’s information system, which includes both financial and non-financial data. Accounting is the process of identifying, measuring and communicating economic information to permit judgment and decisions by users of the information. The main objective of accounting is to provide information to the users. Accounting is also required to serve some broad social obligations since the accounting information is used by a large body of people such as customers, employees, investors, creditors and government.

Accounting is commonly divided into

(1) Financial Accounting, and

(2) Managerial Accounting.

Financial accounting refers to the preparation of general purpose reports for use by persons outside an organisation. Such users include shareholders, creditors, financial analysts, labour unions, government regulations etc. External users are interested primarily in reviewing and evaluating the operations and financial status of the business as a whole.

Managerial accounting, on the other hand, refers to providing of information to managers inside the organisation. For example a production manager may want a report on the number of units of product manufactured by various workers in order to evaluate their performance. A sales manager might want a report showing the relative profitability of two products in order to pinpoint selling efforts. The financial reports are available from the libraries or companies themselves where as managerial accounting reports are not widely distributed outside because they often contain confidential information. The following figure shows that accounting is part of an organisation system which includes both Financial and non financial data :

Uses of Accounting Information

Accounting provides information for the following three general uses :-

1.  Managerial decision making : Management is continuously confronted with the need to make decisions. Some of these decisions may have immediate effect while the others have in the long run. Decisions regarding the price of the product, make or buy the product or to dropt it, to expand its area of operations etc., are some of the examples of decisions that face management and accounting provides necessary information to arrive at right conclusions.

2.  Managerial planning, control and internal performance evaluation : Managerial accounting plays an important role in the planning and control. By assisting management in the decision making process, information is provided for establishing the standard. Accounting also provides actual results to compare with projections.

• Planning can be defined as the process of deciding how to use available resources. The key word in this definition is deciding, because planning is essentially a matter of choosing the set of alternatives which seem most likely to enable the organisation to meet its objectives. Several different kinds of planning processes can be identified, but most important is periodic planning for the activities of the organisation as a whole.
• Control is the complement of planning. It consists of management’s efforts to prevent undesirable departures from planned results and to take corrective action in response to it.

The planning and control process consist of the following steps :

1. Setting standards as to what actual performance should be.
2. Measuring the actual performance.
3. Evaluating actual performance by comparing actual performance with the standards. This evaluation aids management in assessing actions already taken and in deciding which course of action should be taken in future.

The main relationship between planning and control is the planning produces a plan. This becomes a set of instructions to be executed. The results of the action taken on the basis of the plan are then compared with the planned results. The difference of the plan are interpreted to determine what kind of response is appropriate. A corrective response requires a change in the way of plan is carried out, while adaptive response requires replanning. Each of these leads back to an earlier phase of the process and the loop is completed.

For example where a marketing manger is given a target of sales revenues of Rs. 10 crores, the amount of Rs. 10 crores will serve as a standard for evaluating

the performance of the marketing manager. If annual sales revenues vary significantly from Rs. 10 crores, steps will be taken to ascertain the causes for the difference. When the factors leading to the variance are not under the control of the marketing manager, then the marketing manager would not be held responsible for it. On the other hand the cause for variance is under the control of marketing manager then he will be held responsible in evaluating the performance of marketing manager.

3.  External Financial reporting and performance evaluation : Accounting has always been used to supply information to those who are interested in the affairs of the company. Various laws have been passed under which financial statements should be prepared in such way that required information is supplied to shareholders, creditors, government etc. For example, the investors may be interested in the financial strength of the business, creditors may require information about the liquidity position, government may be interested to collect details about sales, profit, investment, liquidity, dividend policy, prices etc. in deciding social and economic policies. Information is required in accordance with generally accepted accounting principles so that it is useful in taking important decisions.