Accounting: Measuring Business Performance for Decision-Makers - Essay Sample

Introduction

Businesses use the term accounting to communicate the information necessary to the managers, investors, and owners to evaluate the company's performance. Operations and activities of a business affect the stakeholders, and through accounting, they make informed financial decisions. Accounting is, therefore, a process through which the business activities are measured and summarized, the financial information is interpreted, and the results are communicated to the decision-makers and management. Financial and management accounting are the two fields of accounting that decision-makers use to improve business performance. Management accounting and financial accounting are two different entities.

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Management accounting is also known as cost accounting and aims at offering information to managers and other users in a company to facilitate better-informed decision making. Managers spearhead management accounting and play roles such as planning, controlling, and evaluating. Mainly, management accounting is critical in offering essential information to the managers to aid and facilitate the managers' three roles, namely planning, controlling, and evaluating the roles. To execute the above roles, managerial accounting uses the financial statement to establish the profitability, performance, and potential of the intended plan. An example of managerial accounting is when the organization establishes that one of the topmost salespeople wants to quit the company before the year ends. From the financial statements, the salesperson generates considerable profits to the business, and letting him go would imply huge losses. The move requires the creation of a plan that would bring revenue to the business. As a result, the manager calls for a planning session to design a training plan that will get new sales agents to replace the existing one.

The plan aims to plan for the eventualities that will arise in the future following the exist of the topmost salesperson. The training of new salespersons would replace the existing person yet generate more revenue and expand the sales region than the existing one. The example shows that managerial accounting aim is to play the internal role of evaluating the business potential and performance to develop a plan that can effectively control the future eventuality. The financial outlook helps the managers solve the underlying problem, and streamline the operations, and devise strategies that address forecasts.

Conversely, financial accounting gives information both externally and internally to aid in assessing the financial performance of an organization. Based on the above information, financial accounting informs the stakeholders how smoothly the business is running, while the management accounting helps its running. The stakeholders then make use of the financial performance information and the business activities to make better and informed decisions. Contrary to managerial accounting, financial accounting is external and is, therefore, governed by the rules and guidelines set by the foreign bodies, namely the Financial Accounting Standards Board (FASB), US Securities and Exchange Commission (SEC), and Generally Accepted Accounting Principles (GAAP).

Publicly traded companies must abide by the rules, guidelines, and principles set by the three bodies. The accounting bodies help financial accounting achieve its aim and purpose of evaluating financial health using financial statements. Besides, financial accounting aims to give information about the financial well-being of a company to the stakeholders such as the creditors, business owners, stockholders, among others, to enable them to make informed decisions. The stakeholders evaluate the historical financial information and use it to make informed decisions about the company.

Type of Business

There are several types of businesses, and the main ones include the partnership, sole proprietorship, private and public company and corporation. One person or family owns a sole proprietorship. The financial issues are minimal since it only requires to maintain the expenditures, sales, income, and calculating the profit or the loss attained (Mitchell & Fontana, 2010). A partnership is bigger than a sole proprietorship and is owned by two or more people who come together with common ideas and decide to start a business. A partnership is a lawful business where the owners are guided by a contract or agreement (Mitchell & Fontana, 2010). The partners have unlimited liability, profit, and loss sharing based on the agreement between the partners.

The other type of business is the company and corporation, which are more complex than a sole proprietorship and partnership. A company can either be public or private, but this does not introduce significant differences in terms of their features and the financial accounting information each has to prepare. A company has a board of governors, a memorandum of association, and a memorandum of understanding and a constitution. Another feature of a public limited company is that it exists as a legal entity hence isolating its members from its existence (Mitchell & Fontana, 2010).

The formation, winding up, and operations of a public limited company are governed by regulations, laws, and rules set by the company, from the registrar of companies and the state law. The company's membership requires that it be operated by a minimum of seven members and no maximum membership required. Shares form the highest part of the company’s capital. Besides, a company has a limited liability hence the name public limited company.

A state corporation is one in which the government has a greater share than the public. As a result, the public corporation is owned by the state, which is responsible and accountable for the entire capital. Created through a particular Act of Legislature, a corporation is an autonomous body whose powers, immunities, and duties are defined by the same Act (Mitchell & Fontana, 2010). Like a company, a corporation exists as a corporate body, a legal entity, and an artificial person. As a legal entity and artificial person, a state corporation can enter into a contract without transferring the responsibility to the CEO or manager.

Accounting Information

As a comprehensive information system, accounting provides critical information about the economic status of a business. It shows the financial life of performance and operations. Moreover, there are different types of accounting information that companies prepare or utilize to measure their performance. The various types of accounting information include tax management, information for planning and control of the business, information of the financial position of a business, information of total cost per unit cost, and information for social responsibility (Látecková et al., 2017).

The accounting information of the financial performance and financial position gives information on the net profit and loss of the business. The information consists of a balance sheet and profit and loss account that shows the expenditures, the expenses, income, and the resulting profit or loss that the business has generated within a specific period, usually one year. While a balance sheet shows the financial position of a business, the profit and loss account shows the financial performance. Both the profit and loss account and the balance sheet represent the financial accounting that displays the accounting information of the business (Látecková et al., 2017). Financial accounting also consists of features such as petty cashbook, journal entries, and invoice.

The second type of accounting information is the total cost and per-unit cost, which displays the cost accounting records. Cost accounting information provides accounting information on the value of total cost and the per-unit cost (Látecková et al., 2017). Such accounting information is essential in understanding the cost incurred per every unit of production. Using the cost accounting information, the businessman can estimate the sale process and the profit margin.

The third accounting information type is the accounting information for tax management, commonly referred to as the business's tax accounting. The tax accounting information is needed for tax management and entails the calculations of the income tax on the profit, the VAT Input, and VAT Output. The accounting information for social responsibility is known as social accounting. Such information is characterized by natural resources, financial support to manpower, pollution control cost, and customer satisfaction.

Role of the International Accounting Standards Board (IASB) and Standards Advisory Council (SAC)

Initially, the International Accounting Standards Board (IASB) was known as the International Accounting Standards Committee (IASC) but changed to the current name in April 2001 (Collings, 2013). The board is a non-profit making and an independent private organization guided by the IFRS Foundation Constitution. The board consists of the IASC Foundation that comprises the IASB, the Trustees, the Standards Advisory Council, and the International Financial Reporting Interpretations Committee. It also includes the IASC Foundation Trustees, who are responsible for the appointment of the IASB members.

The trustees are charged with strategizing, governing, and oversight the work and functioning of the IASB. They also oversee that the IFRS Foundation is run and function efficiently. Over the years, the board has ensured that IFRS provides quality and consistent financial reports that benefit the investors and companies. Trustees are also charged with appointing the Standards Advisory Council (SAC). According to Epstein and Jermakowicz (2008), SAC act as channels of communication between the constituents and the IASB. As the communication channels, the members give suggestions on topics that IASB can discuss in offering proposals.

The International Accounting Standards Board (IASB) issues the multinational standards and principles that the financial accountants adhere to when preparing the financial information. The core role that triggered the creation of the board in 1973 was to issue the international accounting standards (Collings, 2013). Although it started by amending various standards, it later began to develop and issue its standards that were commonly referred to as the International Financial Reporting Standards (IFRS).

The critical role that the IASB plays is to issue and develop a unified set of accounting standards for use globally (Ojo, 2010). The standards serve the entire globe, and for this reason, the board ensures that they are all unified and harmonized to ensure they are of high quality.

The board further oversees the trustees of the IFRS Foundation to ensure that they comply with the regulations. Whenever the IFRS Foundation is making the nomination of its trustees, the board comes in to oversee the entire process and make approvements of the trustees who get appointed (Collings, 2013). In this regard, the board plays the role of trustees’ appointment approval. Once the trustees are appointed, they have to perform their new roles and responsibilities well. Such responsibilities and tasks include reporting annually to the Monitoring Board. To ensure that the trustees fulfill and deliver their responsibilities, the board review and further provide advice and guidance.

The trustees work under the Monitoring Board and, as a result, govern their responsibilities. Therefore, the board possesses the authority to invite the trustees for a meeting whene...