Monthly Archives: August, 2012

Accounting Conventions

The term “conventions” includes those customs or traditions which guide the accountants while preparing the accounting statements. The following are the important accounting conventions.

M W E Glautier and B Underdown would like to use ‘accounting conventions’ for those principles on which accounting is based. According to them “the term ‘accounting conventions’ serve in another sense to understand the freedom which accountants have enjoyed in determining their own rules”. “We may classify accounting conventions into two broad groups-those which may be said to go to the very roots of financial accounting, which may call ‘fundamental conventions’ and those which bear directly on the quality of financial accounting information , which we shall describe as ‘procedural conventions’. “In our view, there are only two fundamental conventions which may be said to characterize financial accounting

  1. The entity convention which states that financial accounting information relates to the activities of a business entity only, and not to the activities of the owners.
  2. The money measurement convention which limits the recognition of activities to those which can be expressed in monetary terms. The alteration of either of these two conventions would change the entire nature of financial accounting.

There are several procedural convention which though of great importance affect the manner in which financial accounting information is selected ,analyzed and communicated .Some of these conventions are subjected to criticism , for example, the realization convention which holds that a gain in value may only result from a transaction. The following conventions are generally regarded as the most important conventions in this group.

1. Convention of Disclosure

The disclosure of all significant information is one of the important accounting conventions. It implies that accounts should be prepared in such a way that all material information is clearly disclosed to the reader. The term disclosure does not imply that all information that anyone could desire is to be included in accounting statements. The term only implies that there is to a sufficient disclosure of information which is of material in trust to proprietors, present and potential creditors and investors. The idea behind this convention is that anybody who want to study the financial statements should not be misled. He should be able to make a free judgment. The disclosures can be in the way of foot notes. Within the body of financial statements, in the minutes of meeting of directors etc.

2. Convention of Materiality

It refers to the relative importance of an item or even. According to this convention only those events or items should be recorded which have a significant bearing and insignificant things should be ignored. This is because otherwise accounting will be unnecessarily over burden with minute details. There is no formula in making a distinction between material and immaterial events. It is a matter of judgment and it is left to the accountant for taking a decision. It should be noted that an item material for one concern may be immaterial for another. Similarly, an item material in one year may not be material in the next year.

According to Kohler “Materiality is the characteristic attaching to a statement, fact or item whereby its disclosure or method of giving it expression would be likely to influence the judgment of a reasonable person.”

Accounting is designed by man with a set of objectives. AICPA has observed “The accounting principles cannot therefore be derived from or proven by the laws of nature.” They are rather in the category of conventions or rules developed by man from experience to fulfill the essential and useful needs and purposes, in establishing reliable financial and operating information system to control business activities. In this respect they are similar to principles of commercial and other social disciplines.

3. Convention of Consistency

This convention means that accounting practices should remain unchanged from one period to another. For example, if stock is valued at cost or market price whichever less is; this principle should be followed year after year. Similarly, if depreciation is charged on fixed assets according to diminishing balance method, it should be done year after year. This is necessary for the purpose of comparison. However, consistency does not mean inflexibility. It does not forbid introduction of improved accounting techniques. If a change becomes necessary, the change and its effect should be stated clearly.

Again consistency increases the acceptability of the financial statements since the users are averse to frequent changes. Consistency should not be maintained at the cost of accounting development. There should be flexibility in the methods and practices employed. Otherwise it will stifle the growth of accounting thought. But full disclosure of the changes effected and its effect on the working results and financial statements of the business should be disclosed. This will help the users to ascertain the impact of the changes on the performance of the business.

4. Convention of Conservatism

The rule of the accountant is ‘anticipate no profit but provide for all possible losses’ at the time of recording the business transactions and preparation of annual financial statements. This convention means a caution approach or policy of “play safe”. This convention ensures that uncertainties and risks inherent in business transactions should be given a proper consideration.

If there is a possibility of loss, it should be taken into account at the earliest. On the other hand, a prospect of profit should be ignored up to the time it does not materialize. On account of this reason, the accountants follow the rule ‘anticipate no profit but provide for all possible losses’. On account of this convention, the inventory is valued ‘at cost or market price whichever is less.’ The effect of the above is that in case market price has gone down then provide for the ‘anticipated loss’ but if the market price has gone up then ignore the ‘anticipated profits.’ Similarly a provision is made for possible bad and doubtful debt out of current year’s profits.

Because of the convention of conservatism inventory is valued at ‘lower of cost or market price and provision is made for bad and doubtful debts out of current year’s profits. But reckless application of this convention may lead to creation of ‘secret reserves’ and the financial statements may fail to disclose a true and fair view of the state of affairs of the business.

References:

http://www.accounting4management.com/accounting_conventions.htm

Four Cs Framework

 

Costs

First, analyze your business unit’s strategic cost position relative to its competitors’, and identify opportunities for cost reduction. Address the following questions:

  1. Relative cost position. Do competitors have a cost advantage? Why are we (or they) performing above or below what we would expect, given our relative market position? What is our full potential cost position?
  2. Experience curve. To what extent is the business unit using its experience curve to drive down unit costs? Where are we versus competitors? What will prices be five years from now?
  3. Cost-sharing analysis. Is this business separate from another? How well can competitors in related businesses attack our business? Does the benefit of sharing costs with our other business units outweigh any lack of focus that sharing costs across multiple businesses would introduce?
  4. Best demonstrated practices (BDPs). How low can we take our costs if we employ the best internal and external practices? How low can competitors take costs? (Benchmarking is a related tool in this analysis.)
  5. Product-line profitability/cost allocation/activity-based costing. Which products and customers really make the money? Which ones should we drop?

 

Customers

Next, turn to customers to identify revenue- and profit-maximizing strategies.

  1. Market overview and map. What is the market size? Is it growing? How is it broken down by geography, products, and segments? What is each competitor’s market share?
  2. Customer segmentation. Which parts of the market require different offerings? Are we fully penetrated in some segments and neglecting others? Can we adjust our offerings to grow sales or increase price realization? Which segments are financially attractive for us to invest in?
  3. Distribution-channel analysis. What range of channels is possible for each product/service? Do some offer superior economics? Are we reaching our full potential in each?
  4. Customer retention and loyalty. How can we identify the most profitable customers? How many more of them are there yet to reach? How do we increase our retention of our best customers? What is the profit impact of increasing retention by X percent?
  5. Customer acquisition. How/where can we acquire profitable customers? What will it cost?

 

Competitors

Third, investigate opportunities to achieve differentiation and preempt competitor moves.

  1. Competitive position overview. What is the business unit’s market share/revenue and profit by geography, product, and segment? What are its strengths, weaknesses, opportunities, and threats (SWOT)?
  2. Profit pool analysis. Are we (or others) getting our fair (or better) share of the industry’s available profits? Where in the value chain is the profit concentrated? Can we move to capture more of it?
  3. Competitive dynamic. How will competitors act or react to external events? To our strategic actions (such as a merger or acquisition)?
  4. Relative performance. How do we and each competitor make the profits expected by the relative market share we have? Are we/they underperforming operationally? Is the business correctly defined?

 

Capabilities

The fourth, and often overlooked, “C” – capabilities – considers strategies that best fit with the business unit’s core competencies.

  1. Core competencies. What special skills or technologies does the business unit have that create differentiable customer value? How can it leverage its core competencies? What investments in technology and people will help build unique capabilities?
  2. Make versus buy analysis. What products should the business unit make itself, and what products should it buy from another company?
  3. Organizational structure. What organizational structure will enable the business unit to implement its strategy most effectively? How can all other aspects of the organization be aligned with the strategy (such as compensation, incentives, promotion, information flow, authority, and autonomy)?

 

References

http://www.mbaboost.com/content/187/

 

Accounting Concepts

Accounting is the language through which the performance and financial status of an enterprise is communicated to the outside world. In order that the messages communicated through the accounting language is understood by the users, there should be certain common principles. Accountants all over the world agree on certain basic points on which financial accounting theory and practice are based, which are commonly referred to as ‘accounting concepts’ and ‘accounting conventions’

Accounting Concepts and Conventions are general guidelines that all accountants should know and follow when recording day-to-day business transactions and preparing financial accounts. This unit outlines these main principles.

 

Accounting Concepts

The term concepts includes those basic assumptions or conditions upon which accounting is based. The reason why some of these ideas should be called concepts is that they are basic assumptions and have a direct bearing on the quality of financial accounting information. The alteration of any of the basic concepts (or postulates) would change the entire nature of financial accounting.

Accounting concepts are also basic assumptions or truths which are accepted by people without further proof. They are conceptual guidelines for application in the financial accounting process. According to Glenn A. Wisch and Daniel G. Short the concepts are important because they

  1. Help to explain the ‘why’ of the accounting
  2. Provide guidance to deal with new accounting problems
  3. There is no need to memorize accounting procedures.

1. Business Entity Concept

In accounting, we differentiate the business and the owner, both are treated as separate entities. Accounts are prepared to give information about the business and not about those who own it. All the records are kept from the viewpoint of the business rather than from that of the owner. A distinction is made between business transactions and personal transactions.

Without such a distinction, the affairs of the business will be mixed up with the private affairs of the proprietor and the true picture of the firm will not be available. The private transactions of the owner will be recorded separately and will have no bearing on the business transactions. All the transactions of the business are recorded in the books of the business from the point of view of the business as an entity and even the proprietor is treated as a creditor to the extent of his capital.

2. Going Concern Concept

Accounting assumes that the business (an accounting entity) will continue to operate for a long time in the future unless there is good evidence to the contrary. The enterprise is viewed as a going concern, that is, as continuing in operation, at least in the foreseeable future. The owners have no intention nor have they the necessity to wind up or liquidate its operations.

According to going concern concept it is assumed that the business will exist for a long time to come. Transactions are recorded in the books keeping in view the going concern aspect of the business unit. A firm is said to be going concern when there is neither the intention nor necessary to wind up its affairs. In other words, it should continue to operate at its present scale in the future. On account of this concept the fixed assets are shown in the balance sheet at a diminishing balance method i.e., going concern value.

There is no need to show assets at market value because these have been purchased for use in future and earn revenues and for sale purpose. If the business is not to continue then market value will have significance. Since business is to continue, fixed assets will be shown at cost less depreciation basis. It is due to the concept that the fixed assets are depreciated on the basis of their expected life than on the basis of market value. The concept also necessitates distinction between expenditure that will render benefit over a long period and that whose benefit will be exhausted quickly, say within one year. The going concern concept also implies that existing liabilities will be paid at maturity.

However, if the accountant has good reasons to  believe that the  business,  or some part of it, is going to be liquidated or that it will cease to operate (say within a year or  two), then the resources could be reported at their current values (or  liquidation values).

3. Money Measurement Concept:

In accounting, only those transactions which can be expressed in terms of money are recorded. As money is accepted not only as a medium of exchange but also as a store of value, it has a very important advantage since a number of widely different assets and equities can be expressed in terms of a common denominator.

Transactions or events which cannot be expressed in money do not find place in the books of accounts though they may be very useful for the business. For example, if a business has got a team of dedicated and trusted employees, it is definitely an asset to the business, but since their monetary measurement is not possible, they are not shown in the books of business. It should be remembered that money enables various things of diverse nature to be added up together and dealt with. The use of a building and the use of clerical service can be aggregated only through money values and not otherwise.

4. Cost Concept

The resources (land, buildings, machinery, property rights, etc.) that a business owns are called assets. The money values that are assigned to assets are derived from the cost concept. This concept is closely related to the going concern concept.

According to this concept, the asset is recorded in the books at the price at which it was acquired i.e., at its cost price. This cost serves the basis for the accounting of this asset during the subsequent period. The ‘cost’ should not be confused with ‘value’. It must be remembered that as the real worth of the assets changes from time to time, it does not mean that the value of such an asset is wrongly recorded in the books. The book values of the assets as recorded do not reflect their real value. They do not signify that values noted therein are the values for which they can be sold.

Though the assets are recorded in the books at cost, in course of time, they are reduced in value on account of depreciation charges. The idea that the transactions should be recorded  at cost rather than at a subjective or arbitrary value is known as cost concept. With the passage of time, the market value of fixed assets like land and buildings vary greatly from their cost. These changes in the value are generally ignored by the accountants and they continue to value them in the balance sheet at historical cost. The principle of valuing the fixed assets at cost and not at market value is the underlying principle in cost concept. According to them the current values alone will fairly represent the cost to the entity.

The cost principle is based on the principle of objectivity. There is no room for personal assessment in showing the figures in accounting records. If subjectivity is flowed in records the same assets will be valued at different figures by different individual. Everybody will have his own views about various assets. The cost concept is helpful in making truthful records. The records become more reliable and comparable.

5. Dual Aspect Concept:

This is the basic concept of accounting. Modern accounting system is based on dual aspect concept. Dual concept may be stated as “for every debit, there is a credit”. Every transaction should have two sided effect to the extent of same amount. For example, if A starts a business with a capital of $10,000. There are two aspects of the transaction. On the one hand the business has assets of $10,000 while on the other hand the business has to pay to the proprietor a sum of $10,000 which is taken as proprietor’s capital. This expression can be shown in the form of following equation:

Capital (Equities)       =       Costs (Assets)

10,000                    =       10,000

The term ‘assets’ denotes the resources owned by a business while the term ‘equities’ denotes the claims of various parties against the assets. Equities are of two types. They are owners equity and outsiders equity. Owner’s equity (or capital) is the claim of the owner’s against the assets of the business while outsiders equity (liabilities) is the claim of outside parties against the assets of the business. Since all assets of the business are claimed by someone (either owners or outsiders), the total of assets will be equal to total of liabilities. Thus:

Equities         =       Assets

OR      Liabilities        +       Capital =       Assets

Suppose if the business borrows $5000 from a bank, dual aspect of this transaction will be

Capital + Liabilities    =       Assets

A  Loan

10,000                     =       15,000

Thus the accounting Equation states that at any point of time the assets of any entity must be equal (in monetary terms) to the total of owner’s equity and outsider’s liabilities. As a matter of fact the entire system of double entry accounting is based on this concept.

6. Accounting period concept

According to this concept, the life of the business is indefinite. Since the life of the business is considered to be indefinite (according to going concern concept) the measurement of income and studying financial position of the business according to the above concept, after a very long period would not be helpful in taking proper corrective steps at the appropriate time. It is, therefore, absolutely necessary that after each segment or time interval the businessman must stop and see, how things are going on. In accounting such a segment or time interval is called accounting period. It is usually of a year.

This concept facilitates the preparation of income statement and statement of financial position at the end of each accounting year. This helps to ascertain the operating results (profit/loss) and the financial position of the entity. Only the income and expenses pertaining to the accounting period alone is considered for preparing the income statement distinguishing between ‘capital’ and ‘revenue’. Since the statement of financial position reflects all the transactions till the date of its preparation, all items not considered in the preparation of income statement should be considered in its preparation. The concept of annual financial reporting has arisen out of the accounting period concept.

7. Matching concept

The aim of business is to earn profit. In order to ascertain the profit the costs (expenses) are matched to revenue. The difference between income from sales and costs of producing the goods will be the profit. When business is taken as a going concern then it becomes necessary to evaluate the performance periodically.

A correct statement of income requires a distinction between past, present and future expenditures. A distinction between capital and revenue expenditure is also necessary. The revenues and costs of same period are matched. In other words, income made by the business during a period can be measured only when the revenue earned during a period is compared with the expenditure incurred for earning that revenue. The question when the payment was received or made is irrelevant.

8. Realization Concept

This concept emphasises that profit should be considered only when realised. The question is at what stage profit should be deemed to have accrued? Whether at the time of receiving the order or at the time of execution of the order or at the time of receiving the cash? For answering this question the accounting is in conformity with the law and Recognises the principle of law i.e., the revenue is earned only when the goods are transferred. It means that profit is deemed to have accrued when property i goods passes to the buyer, viz., when sales are made.

References:

http://www.accounting4management.com/accounting_concepts.htm

Characteristics of Successful Entrepreneur

Many people dream of running their own businesses. They would like to become entrepreneurs. Entrepreneurship can be exciting, but many go into it not realizing how difficult it is to run their own business. In fact, statistics show that most new businesses will fail within a few years. Startup businesses fail because of the owner’s poor planning, lack of business knowledge, lack of entrepreneurial characteristics, inability to work with others, or failure to choose the right business.

Entrepreneurs are different from each other, but successful entrepreneurs tend to share certain characteristics. Not all of them have developed each of the following to the same degree, but they tend to have developed most of them to some degree. Here are some common characteristics of successful entrepreneurs.

  1. Eye for Opportunity. Many entrepreneurs start by finding a need and quickly satisfying it.
  2. Independence. They want to make their own decisions and do something they enjoy i.e. they enjoy being their own boss.
  3. Self-confident. Entrepreneurs make all the decisions. They must have the confidence to make choices alone and bounce back from a poorly made decision.
  4. Hard Work. Most entrepreneurs start out by working long, hard hours with little pay
  5. Determination and perseverance. Entrepreneurs persist through hard times until goals are met.
  6. Self Confidence. Entrepreneurs must demonstrate extreme self-confidence in order to cope with all the risk of operating their own business.
  7. Goal-oriented. They know what they want, and they are able to focus on achieving it.
  8. Need to achieve and to set high standards. They are motivated by setting and achieving challenging goals.
  9. Discipline. Successful entrepreneurs resist the temptation to do what is unimportant or the easiest but have the ability to think through what is most essential.
  10. Creative. They think of new ways to market their businesses and always look for new solutions to problems.
  11. Act quickly. They are not afraid to make quick decisions when necessary, which helps them beat their competitors.
  12. Judgment. Successful entrepreneurs have the ability to think quickly and make wise decisions
  13. Up-to-date with technology. New technologies emerge that can help with many business activities. In order to run their business efficiently, entrepreneurs should always be on the lookout for new technology they can apply to their business.
  14. Ability to accept changes. Changes occur frequently when you do your own business, the entrepreneur thrives on changes and their business grow
  15. Focus of profit. Successful entrepreneurs always have profit margin in sight and know that their business success is measured by profits.

Characteristics of Good Team Members

Entrepreneurs realize that there are other stakeholders in their businesses—partners, investors, employees, suppliers, customers, creditors, and so forth. They must work with others to get their business up and running. They must have good team-building skills as well as be effective team members. Good team members display the following traits.

1. Commitment

They are committed to team goals and willing to work hard to achieve the goals.

2. Competency

They have the right skills needed to get the job done and to help accomplish the team’s goals.

3. Communication

They have good communication skills and can share ideas with others in both oral and written form.

4. Cooperation

They must work well with others and know that they will not always get their way. They are willing to accept the decision of the group for the good of the group.

5. Creativity

They are able to look at things from different perspectives and suggest new ways of doing things.

Determinants of Demand

Based on our discussion so far, we can say that the demand for a product largely depends on its price. But price is not the only factor that influences demand. The demand for a product also depends on factors such as income available with consumers for spending, price of related goods, expectations regarding future prices, consumer preferences, and the number of buyers in the market. The quantity of a product that consumers are willing and able to buy at any given price changes, if any of these factors change. Let us understand these factors in detail:

a. Income of the consumer

Income is an important factor influencing the consumer demand. The disposable income of an individual also determines demand. The higher the income more is the quantity demanded and vice versa. Products for which demand for goods is positively linked are called normal goods, and for those which it is negatively linked are called by economists as superior goods.

b. Price of the substitute product

A substitute product is one that provides the same level of satisfaction as the product already being consumed by the consumer. Assume that two products A and B are perfect substitutes for each other. If the price of a product A goes up, while B remains constant, demand for B will go up as consumers will switch from product A to B. We can think of tea and coffee as an example of substitute products.

c. Price of complementary product

Complementary products are products that are consumed together. For example, car and petrol or shoe and polish, etc. In this case, if the price of one product goes up the demand for the other product decreases.

d. Changes in policy

The demand of a particular product also depends upon government policies. For example, if the government increases taxes on products, prices increase and hence the demand decreases in the short run. Change in government policies may also have a negative impact on the demand for a particular product. For example, increase in tax on cigarettes may reduce the demand of this product.

e. Tastes and preferences of the consumer

The tastes and preferences of the consumer also affect the demand for a product. To an extent, prevailing fashion, advertising and an overall increase in standard of living influence consumer tastes.

f. Consumers’ Wealth

While considering the purchasing power of the consumer, current income is not the only factor that brings about a shift in the demand curve. The existing wealth of the consumer can be in the form of stocks, bonds, real estate, etc. which can be used to purchase goods.

g. Expectation regarding future price changes

If a consumer expects a fall in the price of a product in the near future, he may reduce his present consumption of that product. However, the extent to which he can reduce his present consumption depends on the nature of the product. If the product is essential or perishable one, the consumer cannot postpone his purchase. For example, if reduction of petrol prices is expected in near future, consumers tend to postpone their purchases. However, they can do it only for a certain period because petrol being a commodity of regular use, its requirement cannot be postponed for too long.

h. Special influence

Demand is also influenced by factors like climatic changes, demographic changes, etc. Certain factors may affect the demand only for a particular product. For example, the demand for woolen garments goes up only in winter. In India, the demand for cars is influenced by various factors like per capita income, introduction of new models, availability and cost of car financing schemes, price of other models of cars, prevailing duties and taxes, depreciation norms, fuel cost, public transport facilities, etc.

i. Number of Consumers

Another factor influencing demand is the number of potential buyers in the market. Clearly, the more number of consumers for the demand greater is the demand for the product. As more number of people are now wanting smart phones as a result the demand for it is increasing.

Let us look at an example of a normal good and how does the demand changes for it

Source: Microeconomics, 10e, 2012, Parkin

The Fundamental Economic Problem

Look around you and you will notice one important thing none of the people around you will be happy and satisfied with what they have. For instance, a person with no house of his own would be wanting to have a small house of his own, one with a small house may want to own a bigger house, one with big house will desire a mansion of his own.

People always desire and want more than what they have, ask people to make a list of things they want and you will find things one would never hope to obtain but still in the list.

Scarcity

The fundamental economic problem facing all societies is that of scarcity. Scarcity is the condition that results from society not having enough resources to produce all things people would like to have.

The below figure explains how scarcity affects every decision that we make. This is where the study of economics comes in. Economics is the study of how people try to satisfy their unlimited wants with limited resources.

 

Needs and Wants

We often hear about economists talking about needs and wants. A need is a basic requirement necessary for survival of life such as food, clothing and shelter. Want is something we would like to have but is not necessary for survival. Because many foods will satisfy the need for nourishment, the range of things represented by the term want is much broader than that represented by the term need.

Because resources are limited, everything we do has a cost—even when it seems as if we are getting something “for free.” For example, do you really get a free meal when you use a “buy one, get one free” coupon? The business that gives it away still has to pay for the resources that went into the meal, so it usually tries to recover these costs by charging more for its other products. In the end, you may actually be the one who pays for the “free” lunch!

Realistically, most things in life are not free, because someone has to pay for producing them in the first place. Economists use the term TINSTAAFL to describe this concept. In short, it means There Is No Such Thing As A Free Lunch.

Reference:

Economics – Principles and Preferences, 2008 Ed, Clayton.

What is Operations Management?

Operations management is the activity of managing the resources which produce and deliver products and services.

Every business is managed through three major functions: finance, marketing, and operations management. Finance is the function responsible for managing cash flow, current assets, and capital investments. Marketing is responsible for sales, generating customer demand, and understanding customer wants and needs. Most of us have some idea of what finance and marketing are about, but what does operations management do?

Operations Management is the function of managing the operating core of an organization: the activities associated with creation, production, distribution and delivery of the organization’s goods and services. Operations management is a management function. It involves managing people, equipment, technology, information, and many other resources. Operations management is the central core function of every company.

Without operations, there would be no goods or services to sell. Consider a retailer such as Gap that sells casual apparel. The marketing function provides promotions for the merchandise, and the finance function provides the needed capital. It is the operations function, however, that plans and coordinates all the resources needed to design, produce, and deliver the merchandise to the various retail locations. Without operations, there would be no goods or services to sell to customers.

The role of operations management is to transform a company’s inputs into the finished goods or services. Inputs include human resources (such as workers and managers), facilities and processes (such as buildings and equipment), as well as materials, technology, and information. Outputs are the goods and services a company produces. The below figure shows this transformation process.

At a factory the transformation is the physical change of raw material into final goods or products.

Operations Management is essential in orchestrating all the resources needed to product the final product. This includes designing the product; deciding what resources are needed; arranging schedules, equipment, and facilities; managing inventory; controlling quality; designing the jobs to make the product; and designing work methods. Basically, operations management is responsible for all aspects of the process of transforming inputs into outputs. Customer feedback and performance information are used to continually adjust the inputs, the transformation process, and characteristics of the outputs.

For operations management to be successful, it must add value during the transformation process. We use the term value added to describe the net increase between the final value of a product and the value of all the inputs. The greater the value added, the more productive a business is. An obvious way to add value is to reduce the cost of activities in the transformation process. Activities that do not add value are considered a waste; these include certain jobs, equipment, and processes. In addition to value added, operations must be efficient.

Efficiency means, being able to perform activities well, and at the lowest possible cost. An important role of operations is to analyze all activities, eliminate those that do not add value, and restructure processes and jobs to achieve greater efficiency. Today’s business environment is more competitive than ever, and the role of operations management has become the focal point of efforts to increase competitiveness by improving value added and efficiency

Within operations functions, management decisions can be divided into three broad areas:

  • Strategic (long-term) decisions
  • Tactical (intermediate-term) decisions
  • Operational planning and control (short-term) decisions

The strategic issues are usually broad, addressing questions such as

–      How will we make the product?

–      Where do we locate the locate the facility or facilities?

–      How much capacity do we need?

–      When should we add capacity?

Thus, by necessity, the time frame for strategic decision us typically long – usually several years or more, depending upon the type of industry.

Operations management at the strategic level affects the company’s long-range effectiveness in terms of how it can address its customer’s need. Thus, for the firm to succeed, these decisions must be in alignment with the corporate strategy. Decisions made at the strategic level become the fixed conditions or operating constraints under which the firm must operate in both intermediate and short term.

At next level the decision-making process, tactical planning primarily addresses how to efficiently schedule material and labor within the constraints of previously made strategic decisions. Issues which Operations management concentrates at this level include

–      How many workers do we need?

–      When do we need them?

–      Should we work overtime or put on second shift?

–      When should we have material delivered?

These tactical decisions, in turn, become the operating constraints under which operational planning and control decisions are made.

Management decisions with respect to operational planning and control are narrow and short term by comparison. Issues at this level include:

–      What jobs do we work on today or this week?

–      Whom should we assign which task?

–      What jobs have priority?

Elements of Communication

Communication consists of three important elements, when we communicate with people we do it with much more than our words. In face-to-face communication words are only the part of the message. The balance of the message is made up of nonverbal and visual communication.

Verbal communication

Verbal communication is a type of communication where the information flows through verbal medium like words, speeches, presentations etc. In verbal communication the sender shares his/her thoughts in the form of words. In organizations, individuals communicate verbally among each other in the form of dialogues, speech, presentations, discussions to name a few. The tone of the speaker, the pitch and the quality of words play a crucial role in verbal communication. The speaker has to be loud and clear and the content has to be properly defined. Haphazard and unorganized thoughts only lead to confusions and misunderstandings among individuals. In verbal communication, an individual must understand the importance of words and how to put them across.

While speaking the pitch ought to be high and clear for everyone to understand and the content must be designed keeping the target audience in mind. In verbal communication it is the responsibility of the sender to cross check with the receiver whether he has downloaded the correct information or not and the sender must give the required response.

This is the least impactful element in face-to-face communication. The old adage – it is not what you say, it is how you say that counts.

Nonverbal communication

Imagine yourself in a situation, where you can’t speak but have to communicate urgent information to the other person or for that matter, you are sitting in an important meeting and you want to express your displeasure or pleasure to your colleague without uttering even a word. Here nonverbal mode of communication comes into picture. Facial expressions, gestures, hand and hair movements, body postures all constitute nonverbal communication. Any communication made between two people without words and simply through facial movements, gestures or hand movements is called as nonverbal communication. In other words, it is a speechless communication where content is not put into words but simply expressed through expressions If one has a headache, one would put his hand on his forehead to communicate his discomfort – a form of nonverbal communication. Nonverbal communications are vital in offices, meetings and even in romantic chats.

Examples of nonverbal communication

–      Facial Expression

–      The way of standing or sitting

–      Any swing or any other movement

–      Gestures with arms or hands

–      Eye contact (or lack of it)

–      Breathing rate

–      Swallowing or coughing

–      Blushing

–      Fidgeting

Body language includes anything what the speaker is doing with his body besides speaking. One recognizes this communication instinctively without someone telling us what it means.

Visual Communication

Before planning any outing or tour, Sandra always refers to the map of that place. Through the map, she tries to find out more about the place, the route to reach that place, hotels, shopping joints etc. The map is actually passing information about the place to Sandra or communicating with Sandra. This mode of communication is called visual communication. In visual communication, the recipient receives information from signboards, displays, hoardings, banners, maps etc. The sign board of Mc Donald’s or KFC indicates eating joints – a form of visual communication. The sign board of “No Parking Zone” communicates to the individuals that any vehicle must not be parked in the vicinity – again a mode of visual communication. Vision plays a very important role in visual communication and it depends on the recipient how to interpret the message.

What is accounting?

Accounting is something which affects every individual in every part of this life, be it buying grocery from the market, or be it purchasing a book online. However all individuals do not record their day-to-day transactions, but organizations do.

 

Accounting is the process of identifying, measuring and communicating financial information about an entity to permit informed judgments and decisions by users of the information.

 

This definition may appear short but it has been widely quoted over a number of years and is sufficient to specify the entire contents of this introductory textbook. Taking the definition word by word, it leads to the following questions:

  1. What is the process?
  2. How is financial information identified?
  3. How is financial information measured?
  4. How is financial information communicated?
  5. What is an entity?
  6. Who are the users of financial information about an entity?
  7. What types of judgments and decisions do these users make?

 

Recording Accounting Data

When it comes to accounting, people consider it as used by business and organizations. Businesses and organizations cannot keep and handle the accounting activities and data in their mind and thus must record it in a proper way.

 

Classifying and Summarizing Accounting Data

First the data is recorded in a proper manner, must be organized so as to be most useful to the business.  Doing such classifying and summarizing of accounting records, it will become easy to workout profit or loss has been made by the business in a particular period of time.  Business can also find the resources are owned and what is owed by it in a particular period of time.

 

Communicating Accounting Information

By recording and classifying accounting data, those have skilled in the accounting should be able to tell whether business is performing well or not and what are the strengths and weaknesses of the business. Finally they will be able to communication and share information with the business owners and other stakeholders. Therefore, accounting is

1.       Recording of data

2.       Classifying and summarizing of data

3.       Communicating accounting information

 

Writing the questions in this order is slightly dangerous because it starts by emphasizing the process and waits until the final question to ask about the use of the information. The danger is that accountants may design the process first and then hope to show that it is suitable to allow judgments and decisions by users. This is what has often happened over many years of developing the process by accountants.

 

In order to learn about, and understand, accounting by taking a critical approach to the usefulness of the current processes and seeing its limitations and the potential for improvement, it is preferable to reverse the order of the questions and start by specifying the users of financial information and the judgments and decisions they make. Once the users and their needs have been identified, the most effective forms of communication may be determined and only then may the technical details of measurement and identification be dealt with in a satisfactory manner.

 

 

Users of accounting information

Users Following may be possible users of accounting information

Business owners:

Owners want to be in picture whether their business is profitable or not and what financial resources they have.

 

A Prospective Buyer

If the owner is interested to sell the business the buyers must have the due rights to access the all financial information.

 

Financial Institutions

When the businesses are in need to borrow money they must share concern financial information to banks and financial institutions

 

Governmental Agencies

Different Government Agencies like Tax Department need financial information to calculate the taxes.

 

Both Internal users those inside the business and External users those outside the business have interest in financial information of a business. One thing is certain, without proper recording accounting data it will be difficult to communicate the information prospective users and stakeholders.

 

Communication Model by Aristotle

Aristotle, a great philosopher initiative the earliest mass communication model called “Aristotle’s Model of Communication”. He proposed model before 300 B.C who found the importance of audience role in communication chain in his communication model. This model is more focused on public speaking than interpersonal communication. He was the first to take an initiative and design the communication model.

The model is simple & linear. In this model, communication is said to be persuasive in nature. It is presented in the diagram.

The five basic elements of the model are

  1. Speaker
  2. Speech
  3. Occasion
  4. Audience
  5. Effect

According to this model, the speaker plays a key role in communication. He is the one who takes complete charge of the communication. The speaker must be very careful about his selection of words and content in this model of communication. He should understand his target audience and then prepare his speech. Making eye contact with the second party is again a must to create an impact among the listeners.

The Aristotle model of communication is the widely accepted and the most common model of communication where the sender sends the information or a message to the receivers to influence them and make them respond and act accordingly. Aristotle model of communication is the golden rule to excel in public speaking, seminars, lectures where the sender makes his point clear by designing an impressive content, passing on the message to the second part and they simply respond accordingly. Here the sender is the active member and the receiver is passive one.

This limitation of their model is that it represents communication as a static phenomenon. The steps follow one after the other instead of occurring simultaneously. The model concentrates on persuasive communication which occurs when someone intentionally tries to persuade someone. Some aspects are not mentioned like feedback, non-verbal communication, etc. But still this model is important as it carries historical significance.