The Use of Accounting as a Management Tool

The Use of Accounting as a Management Tool

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Accounting, unlike the other natural sciences, is not based on fundamental laws or absolute precepts. It has evolved over many years through trial and error, and its continual improvement rests on a basis responsive to the requirements of users of financial statements. The domain of financial accounting is therefore visualized as requiring attention at four levels: postulates are the antecedent conditions or essential prerequisites to principles; the principles must meet the supported by the principles. This framework of accounting standards and guidelines defines the area accounting theory. Theories are generalizations, which serve to organize otherwise masses of data, and which thereby establish significant relationships in respect of such data.

Accounting theory is therefore the logical reasoning in the form of a set of broad principles that provide a general frame of reference by which accounting practices can be evaluated, and which guide the development of new practices and procedures. It thus provides a coherent set of systematic principles that form the general structural framework for the evaluation, and development of sound accounting practices. It presents the value judgments upon which accounting principles, concepts and policies are based. These policies regulate moderate and direct practices and lead to reports which are used by decision-makers. Without a good knowledge of accounting theory, accounting becomes mechanistic, routine and repetitive drudgery. Osisioma (1986: 40) stated that; Accounting involves the collection compilation and systematic recording of business transactions in terms of money, the preparation of financial reports and the use of these reports as tools of management …

Management is heavily dependent on accounting operation facts. Management is regarded as a process of converting information into action and accounting is the source of most of the information. Accounting is a system of principles and techniques that permits the recording, classification, accumulation, presentation and interpretation of financial information so that past performance, present condition and future planning can be evaluated. The decision-making process of accounting normally involves planning and control. Accounting formalizes plans by expressing them in the language of figures as budget and control as performance reports which compare results with plans and spotlight deviations or variances from plans.

The importance of accounting information in management can be applied to any organization without regard to its size. Willsmore (1971: 1)observed that;… Even in the very personal business management can only take place through figures; results, reporting and the man who doesn’t understand that must fail…Managing a business is a matter of deciding what should be done, seeing to it that the means are available and getting people employed in the business to do it. At every step in this process, management is faced with alternatives, and every decision, to do something or to refrain from doing something involves a choice. In most cases, the probability that a good decision will be made depends on the extent and validity of the information that the manager has about the alternatives and their consequences information which flows from the accounting records or which are developed by special analysis of accounting data constitutes the basis on which a wide variety of business decisions are made. Accounting involves the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information. The success or failure of accounting as a management tool will depend upon the philosophy on which it was established and the attitude of management towards it as well a the skills involved.