Accounting As The Basis For Business Decisions

How do business executives know whether a company is earning profits or incurring losses? How do they know whether the company is solvent or insolvent, and whether it probably will be solvent, say, a month from today? The answer to both these question in one word is accounting. Accounting is the process by which the profitability and solvency of a company can be measured. Accounting also provides information needed as a basis for making business decisions that will enable management to guide the company on a profitable and solvent course.
For specific examples of these decisions, consider the following questions.
1. What prices should the firm set on its products? If product is increased,
2. What effect will this have on the cost of each unit product?
3. Will it be necessary to borrow from the bank?
4. How much the costs increase if a pension plan is established for employees?
5. Is it more profitable to produce and sell product A or product B?
6. Shall a given part be made or be bought from suppliers?
7. Should an investment be made in new equipment?

All these issues call for decisions that should depend, in part at least, upon accounting information. It might be reasonable to turn the question around and ask: What business decisions could be made intelligently without the use of accounting information? Examples would be hard to find.
In large-scale business undertakings such as the manufacture of automobiles or the operation of nationwide chains of retail stores, the top executives cannot possibly have close physical contact with and knowledge of the details of operations. Consequently, these executives must depend to an even greater extent than the small business owner upon information provided by the accounting system.
We have already stressed that accounting is a means of measuring the results of business transactions and of communicating financial information. In addition, the accounting system must provide the decision maker with predictive information for making important business decisions in a changing world.
Reference : Walter B. Meigs, Robert F. Meigs, McGraw-Hill Book Company New York, 1987, “Financial Accounting”.