explain the role of accounting in providing information for monitoring progress and decision-making

1.1 The Purpose of Accounting

Key statement

Accounting supplies reliable financial information that enables users to monitor performance and to make informed decisions about the future of the business.

Why accounting exists

Accounting records, classifies, summarises and interprets financial information about an entity so that a range of users can assess the entity’s financial position, performance and cash‑flows.

Book‑keeping vs Accounting

• Book‑keeping – the systematic recording of every financial transaction.
  Example: a cash sale of £500 is entered in the cash book as a debit to Cash and a credit to Sales.
• Accounting – takes the recorded transactions, classifies and summarises them and then interprets the results to produce reports such as the profit‑and‑loss account, balance sheet and cash‑flow statement.
  Example: the £500 cash sale is posted to the Sales ledger, included in the total sales figure, and finally reflected in the profit‑and‑loss account and the balance sheet.

In short, book‑keeping provides the raw data; accounting turns that data into useful information for monitoring and decision‑making.

Key users of accounting information

Purposes of measuring profit and loss

• Evaluate efficiency – shows how well the business turns sales into profit, helping managers spot cost‑saving opportunities.
• Calculate tax liability – profit is the basis on which corporation tax and other levies are assessed.
• Determine dividend capacity – owners need to know how much profit is available for distribution after retaining earnings for growth.
• Provide performance benchmarks – profit figures can be compared with previous periods or with rival firms to assess progress.

Decision‑making cycle (Cambridge terminology)

1. Planning – set objectives and prepare budgets or forecasts.
2. Control – measure actual results, calculate variances and ratios, and compare them with the plan.
3. Evaluation – analyse the reasons for any differences and decide on corrective or improvement actions.

Accounting outputs are linked to each stage:

• Planning – budgets, projected cash‑flows, break‑even analysis.
• Control – actual profit‑and‑loss account, balance sheet, variance reports, performance ratios.
• Evaluation – interpretation of ratios, cost‑benefit analysis, recommendation of alternatives.

How accounting helps monitor progress

Monitoring means comparing actual results with the targets set in the planning stage. The main performance indicators used at IGCSE level are shown below.

How accounting supports decision‑making

At each stage of the decision‑making cycle, accounting provides the quantitative evidence needed to choose between alternatives.

• Planning – budgets and break‑even analysis help decide whether to launch a new product, expand capacity or enter a new market.
• Control – variance analysis (e.g., actual cost vs. budgeted cost) highlights problems that may require a change of supplier, a reduction in waste, or a price adjustment.
• Evaluation – ratio trends and cost‑benefit calculations allow managers to judge the success of a decision and to refine future strategies.

Link between monitoring and decision‑making (flowchart)

Key command‑words for this topic (Cambridge)

• Explain – give a clear account of why something is done (e.g., “Explain why profit and loss are measured”).
• Describe – give a detailed picture of a process or feature (e.g., “Describe how accounting supports decision‑making”).
• Calculate – show the steps and give the numerical answer (e.g., “Calculate the gross profit margin”).
• Comment – interpret a result and state its significance (e.g., “Comment on a fall in the current ratio”).

Summary

• Accounting converts raw transaction data into meaningful information.
• This information lets owners, managers and other users monitor how well the business is performing against its plans.
• Through the decision‑making cycle (planning, control, evaluation) accounting provides the evidence needed to decide between alternatives and to act on those decisions.
• Key performance indicators – ratios and variance analysis – are the tools that link monitoring with decision‑making.
• Understanding these concepts and being able to use the required command‑words equips students to meet the Cambridge IGCSE Accounting 0452 syllabus requirements.