The impact of accounting records on

the performance of a business

organization
Aliza Rashid - 16842

Amena Rizvi - 16893

Shanzeh Khan -17001

 Contribution Sheet

Research and elaborated & contributed to main

Shanzeh Khan 40%
body

Amena Rizvi 30% Research and paraphrased intro and main body

Aliza Rashid 30% Compilation, paraphrasing and conclusion.

It is essential for business organisations to keep accounting records for several
reasons. Keeping accurate accounting records allows a business to be able to
prepare and manage information based on which business decisions can be made
about how to manage the business, invest in it, or lend to it. Accounting records
help all the stakeholders stay informed about the financial position of the
business at all times.

The accounting records of a firm essentially include journal entries, ledgers and
source documents. These sources of data include information about a business’s
day to day activities, from sales receipts, purchases, acquisition of assets and
liabilities, to various expenses and other income. The accounting records of a
typical firm include the general ledger, subsidiary ledgers, invoices, cash receipts
and bank statements.

Once this financial information has been stored in the accounting records, it is
usually compiled into financial statements which include the Income
Statement, Balance Sheet, Statement of cash flows and Statement of retained
earnings.

The recording and storage of accounting records has become a common and
mandatory practice for business organizations since limited companies are
required by law to prepare and disclose their financial statements.

While the focus of uses of accounting records or financial statements tends to be

for usage by banks and non bank institutions, the primary users may actually be
inside the organization, namely managers and other decision makers. If an
organization has to pay taxes to the Internal Revenue Service, they will have to
share lots of information about their income, expenses, debts and other
information about their assets and liabilities. This and other reasons compel a
business to record and maintain their accounting records.

Managers of a business organization can use accounting records to improve its

performance owing to a number of factors. Financial statements are dynamic,
which means they are adjusted various times during the course of a financial year,
depending on the changes in expense and income. Therefore, scrutinizing and
analyzing such statements can aid the process of decision while things are
happening, rather than having to retroactively respond to receiving bad news
later on.

Financial statements also help a business organization in identifying trends. It

provides them of an understanding of their business dealings and helps identify
past and present trends that can lead to problems in the future. This helps the
business tackle the problem before it hits, improving its performance. It can help
businesses pin point strategies that have worked for them, as they can notice the
difference in their sales and revenue figures and what exactly has caused them.
This leads to overall profitability for the firm.

Accounting records also help business in keeping track of their liabilities. A firm
typically has several different types of liabilities including accounts payable, credit
cards and business loans. It is worthwhile for firms to keep a record of these,
since it wants to avoid a poor gearing ratio, negative cash flow or worse,
bankruptcy. This information is also useful when a firm is applying for loans at
financial institutions so it can prove it is creditworthy. Easy access to credit allows
firms to have better cash flow and capital, which all play a trivial role in the
functioning and performance of a business organization.

Another way accounting records can impact the performance of a business is

through providing totals that are crucial for the profitability of firms and this
includes expenses. Controlling costs by monitoring a firm’s expenses is vital, since
uncontrolled costs can prove to be detrimental to the net profits earned by it.
Given the fluid nature of accounting records, an organization can curb a major
loss by checking its expenses before hand and ensure increased productivity in
the long run. The owner gets a fair idea of which department of the firm needs
improvement and expansion, and then with the strategic decision to change the
firm’s focus can improve its performance.

Business organizations can use financial statements to measure their progress

and identify any fraud of theft by employees. Knowing that the organization has
employees who are honest and truthful is important for the managers. Growth in
sales revenue, minimized costs, and higher profits all indicate better progress for
the firm, and when this is achieved, a manager would motivate the employees
more through benefits, which will further better the productivity and overall
performance of the business. Accounting records show all these important
aggregates through which a manager can measure growth of the business.

The performance of a business can be measured by seeing if the goals and targets
have been met or even exceeded. Comparison of current year totals with
previous year’s total helps provide insight of the company’s position, and set
budgetary goals when planning for the next financial period. Additionally, having
a record of a business’s transactions and financial position helps make sound
decisions, helping a business not only survive but also thrive.

Accounting records are not only a way for businesses to keep a track of their
operations, but also provide a snapshot of the company’s financial position.
Moreover, research has shown a strong positive relationship between accounting
record keeping and performance of small-scale enterprises. Keeping proper
business records can be seen as a daunting task at first. However, the key is to
break the stuff down into series of manageable and straight forward tasks that
can be accessed and updated at regular intervals to prevent paper work from
piling up