TAILIEUCHUNG - Accounting for Managers Part 2

3 Recording Financial Transactions and the Limitations of Accounting. In order to understand the scorekeeping process, we need to understand how accounting captures information that is subsequently used for planning, decisionmaking and control purposes. | 3 Recording Financial Transactions and the Limitations of Accounting In order to understand the scorekeeping process we need to understand how accounting captures information that is subsequently used for planning decisionmaking and control purposes. This chapter describes how business events are recorded as transactions into an accounting system using the double-entry method that is the foundation of accounting. In this chapter we also show how the principles underlying accounting can limit the usefulness of accounting information as a management tool. Finally the chapter introduces the notion of cost and how cost may be interpreted in multiple ways. Business events transactions and the accounting system Businesses exist to make a profit. They do this by producing goods and services and selling those goods and services at a price that covers their cost. Conducting business involves a number of business events such as buying equipment purchasing goods and services paying expenses making sales distributing goods and services etc. In accounting terms each of these business events is a transaction. A transaction is the financial description of each business event. It is important to recognize that transactions are a financial representation of the business event measured in monetary terms. This is only one perspective on business events albeit the one considered most important for accounting purposes. A broader view is that business events can also be recorded in nonfinancial terms such as measures of product service quality speed of delivery customer satisfaction etc. These non-financial performance measures which are described in detail in Chapter 4 are important elements of business events that are not captured by financial transactions. This is a limitation of accounting as a tool of business decision-making. Each transaction is recorded on a source document that forms the basis for recording in a business s accounting system. Examples of source documents are .

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