Generally, the day-to-day running of a business organization comprises several transactions which the firm engages in. As a result, there is a need to always keep the records in a systematic manner for decision-making and for reference. Accounting is a systematic way of recording business transactions. The data of all the transactions are recorded and kept mainly for future use. These data are tracked and recorded in a computer-based system (financial accounting system) to facilitate the accuracy of the data. The main users of the accounting information are the shareholders, creditors, financial analysts, vendors, and government agencies. There are various categories of books and documents in which the accounting information is kept. For instance, the books of original entry which comprises of various journals such as cash journal, general journal, purchase journal, and sales journal; and the source documents like, cash receipts, bank statements, and cash statements.
The information from the books of original entries is later posted in the general ledger where financial statements are drafted. A cash flow statement is a financial report that keeps the records of the company inflows and outflows of cash. The statement indicates the net change of an organization and helps to detect the liquidity level of a given firm. On this score, the firm owners can be able to notice whether the company is gaining cash or undergoing losses. In case the company experiences more inflow of cash than the outflow, then it is said to have a positive cash flow. A negative cash flow is attained when there is much outflow of cash than the inflow.
The other document used in recording the transactions of a business entity is the income statement. The income statement also called the profit and loss statement is a statement used to record the financial performance of a given organization. It is as important as it helps an organization to detect the amounts of profit it has made during a given period of time in its operations. The information captained in the financial statements is used by the investors, analysts, and creditors to gauge the financial performance of the firm. Since income statements indicate the profit made by a business after a certain trading period, the investors can use the information in it to gauge the viability of investing in the business. They could detect the risk of losses before they take the step of financing it.
Essentially, the recorded data is compared to the past records in different periods of time. This is referred to as statistical data which summarizes the historical behaviors and tries to forecast the future behavior of the financial records. The statistical data enables correct interpretation used for proper decision making. This interpretation involves different analysts to accurately propose the future position of the entity based on the statistical data. Additionally, the statistical data contains facts and figures which enable the users to read the trends in the data, such as the investor, to make precise decisions in future investments.
After the recording, the business transactions over a given period of time known as a trading period, the requirement of all firms depicts that an annual report must be disclosed to the interested parties. Mainly performed by the chief financial officers of the company, the annual report a comprehensive report declaration on the firm’s activities throughout the previous year. The report is mainly needed by the shareholders in the organization and other parties with interest to evaluate the financial performance of the business. The firms which are registered under the stock exchange market are required to perform the annual report regularly in order to keep the shareholders updated about their share market. The government also requires companies to disclose their annual reports to necessitate the calculation of the amount of tax that should be levied on the organization.
Based on the proceeding data, an analysis of how the items are decreasing or increasing in the business is taken. The trend analysis is a method by which company owners use to predict what might happen to different items in the future affecting the financial performance of the business. After analyzing the trend in the data recorded, the shareholders are able to make both short and long-term predictions about the progress of the business. In order for an organization to perform a proper trend analysis, it must examine carefully the past data and the performance that led to the data, it should keep into consideration the current financial conditions, then use the patterns in data recorded to predict the future financial health of the firm.
An accounting information system is basically the use of computers to track every accounting record of a business entity. The information tracked is majorly used in decision-making by the management of the organization. In order to propagate the effective management of any company, the information contained in the accounting books must be keenly observed to enhance success in the business. Given that the management is always answerable to various parties like the shareholders and the government, the accounting information offers management the required facts used in concluding the business affairs and reporting to the vendors of the organization.
Centered on the organization’s decision-making, the accounting information also enables the management to make the needed adjustment in the operation of the business. The adjustments arise when the enterprise experiences loss during their last trading period. The decision on implementing new methods of running the organization is put in place to enable it to avoid making further losses. Alternatively, when records show that the company has gained great profits from its last period of operation, the management will make the decision of impressing the methods of operation the company applied last to attain the profit. Scrutinizing the information on the financial statement by the management enables it to assess the behavior and patterns of each item resulting in a concrete decision that could compel the business to flourish in the future.