THE USE OF FINANCIAL ACCOUNTING AS A TOOL FOR MANAGERIAL DECISION MAKING

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THE USE OF FINANCIAL ACCOUNTING AS A TOOL FOR MANAGERIAL DECISION MAKING

CHAPTER ONE/INTRODUCTION

BACKGROUND OF 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 polices are based.  Theses 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 a 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 be expressing them in the language of figures as budget and control as performance reports which compare results with plans and spotlight deviations or variances form plans.

The importance of accounting information in management can be applied to any organization without regards 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.

 

As this is known to us that in any organization without making use of accounting tool and qualified accountant, the company will surely face the problem of profit will surely face the problem of profit and wealth maximization. The following question may arise, how did business executive known whether a company is earning profit or incurring losses. Financial accounting provided the rules and structure for the conveyance of financial information about business (and other organization). At any point in time, some businesses are poised to prosper while other teeter on the verge of failure. Many people are seriously interested in evaluating the degree of success achieved by a particular organizations as well as its prospects for the future. While a few basic procedures or methods have changed, the purpose of financial accounting remain the same. Business owners often use accounting to measure the financial performance of their companies and make business decision.

The American institution of certified public accountant has defined the financial accounting as “the art of recording, classifying and summarizing in as significant manner and in terms of money transactions and events which in part at least of a financial characters and interpreting the result there of American accounting association defines accounting as “the process of identifying measuring and communicating economic information to permit informed judgment and decision by users of the information.

It is noteworthy to say here that financial accounting derives its source from accounting transaction data and information. Financial accounting produces results which enhance decision making in the organization. Hence it can safely be concluded that financial accounting is not an end in itself but a mean to an end. i.e. decision making to improve corporate performance and also produces detailed and comprehensible accounting  information which are invaluable basis for decision making.

STATEMENT OF PROBLEM

The factor that necessitated the establishment of accounting system in Guaranty Trust Bank PLC are related to a lot of problem which the management encounter in  the efforts to activate and transform their accounting system into an economic viable one note able among them are;

  1. To minimize risk, failure and uncertainties and also stay ahead of competitors.
  2. Lack of financial accounting information may lead to the non-effective and inefficient accomplishment of the firm’s objectives.
  3. Poor record keeping, in efficient use of accounting information to support their financial decision making and the low quality and reliability of financial data are part of the main problems in financial management concerns of these companies.
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