Inmy understanding, accounting is the tool of communication whichfacilitates the translation of companies’ financials into alanguage that financial users (including management, lenders,creditors and potential investors) understand. I would recognize thebusiness financials by valuing the business activities and events inmonetary terms, and assigning each activity and event value indollars or some other currency (Collisetal.,2012).The revenue earned in a particular event is identified and recordedagainst the liabilities incurred during the same time the resultscan be either profit or loss. Depending on the type of business weapply different General Accepted Accounting Principles (GAAPs). I canquote that accounting is the ‘language of business,’ since theanalyzed accounting data helps communicate the financial position andfinancial performance of the company to us as users. For instance, weas managers of the company can formulate better policies anddecisions after reading the financial statements similarly,investors use the information from financial statements to forecastthe future performance of the entity.
Iunderstand that there are several cases of dysfunctional behavior inaccounting. They occur when information presented in the financialstatements are untrue and misleading. Also, the data provided isbiased in nature and only benefits interested parties (Bebbingtonetal.,2014).I will point out budgetary control systems as a good example, wheredivisional managers decide to make suboptimal budgets which areeasier to achieve allowing them to receive huge bonuses since wemeet our targets. In addition to that, I can demonstrate thataccounting can bring about an agency problem it is the conflictbetween the managers and the shareholders. Shareholders do not trustfinancial statements prepared with the influence of directors. Thiscompels them to hire auditors to ascertain whether the statementspresent true and fair view of company’s financial state. Agencyproblem increases the firm’s expenses through consultation feescharged by auditors and lawyers(Collis etal.,2012).
Ifirmly agree with production managers accounting has led to improvedproduction techniques. Through management accounting, it is easier todetermine the optimal production capacity of each department. I wouldanalyze the historical data from previous financial periods anddevelop a trend which I will use to forecast future demand hencepredict the required output thus allowing me to minimizeoverproduction which may lead to wastage of the excess quantityespecially in the case of perishable products and also reduce underproduction which results in loss of customers. I would emphasize onapplying concepts like absorption costs systems to reduce the cost ofproduction. This concept classifies costs as either fixed orvariable the variable costs vary in proportion to the output whilethe fixed costs are constant (Collisetal.,2012).To cut on the cost of production, I will minimize labor costs,material costs and overheads costs since they are variable. As aproduction manager, I would choose the optimal output that will notincrease the variable costs.
Overthe recent past, I have come to understand that firms have beenrelying on accounting for survival purposes(Collis etal.,2012).Through business combinations, small businesses have merged to createlarge firms while parent companies acquire subsidiaries andassociates so as to increase their income and enhance production.Moreover, I would argue that accounting has allowed companies todisclose important information to the users of the financialstatements. According to International Financial Reporting Standards(IFRS), all material information is disclosed in the financialstatements (Christensen etal.,2013). For instance, I comprehend that when a new company is goingpublic, its prospectus should contain all information material to itsinvestors, and this assists them to make informed decisions whileinvesting in the entity.
Bebbington,J., Unerman, J., & O`Dwyer, B. (2014). Sustainabilityaccounting and accountability.Routledge.
Christensen,H. B., Hail, L., & Leuz, C. (2013). Mandatory IFRS reporting andchanges in enforcement. Journalof Accounting and Economics,56(2),147-177.
Collis,J., Holt, A., & Hussey, R. (2012). Businessaccounting: an introduction to financial and management accounting.Palgrave Macmillan.