Lecture Notes: Business Decision Making, SAB, BBA -2

Business Decision Making

The Language Of Business: (Accounting)

This lecture is organized around the practical

applications of basic bookkeeping and accounting
concepts by providing their concise definitions and
explanations. The aim is to develop an
understanding of how to solve bookkeeping and
accounting problems in the computing world.

The basic concepts of the bookkeeping cycle will

be covered first. The objectives are:

• Understand why accounting information is

important in making business decisions.
• Describe the nature of a Balance Sheet.
• Explain the accounting meaning of assets,
liabilities, and equity.
• Identify the components of a Balance Sheet.
• Analyze business transactions and relate them
to changes on the Balance Sheet.

Inst: Dr. Mohammed Yousuf Khan 1

Lecture Notes: Business Decision Making, SAB, BBA -2

Understanding Accounting & Decision making

process
The purpose of accounting is to provide useful
information in an effective, relevant, and reliable
way for a wide variety of decisions. Anyone
involved in making financial decisions of any
kind: business or personal, should have a clear
understanding of the principles of bookkeeping
and accounting.

The purpose of bookkeeping and accounting is to

provide information concerning the financial
position of an on-going business. This information
is needed by not only bookkeepers and
accountants but also owners, managers, creditors,
and governmental agencies.

An individual person who earns a living by

recording the financial activities of a business is
known as a bookkeeper, while the process of
classifying and summarizing business transactions
and interpreting their effects is accomplished by
the accountants.
The bookkeeper is concerned with techniques
involving the recording of transactions, and the
accountant's objective is the use of data for
interpretation. The book keeping and accounting
technique involves:

Inst: Dr. Mohammed Yousuf Khan 2

Lecture Notes: Business Decision Making, SAB, BBA -2

A.The Nature of Accounting

1. Accounting is a process of identifying,

recording, summarizing and reporting economic
information to decision makers.
2. Financial accounting focuses on the specific
needs of external (outside) decision makers, such
as shareholders, suppliers, banks, and government
agencies.
3. Financial statements, the output of the
accounting process, are the result of the
accountant’s ability to analyze, record, quantify,
accumulate, summarize, classify, report, and
interpret economic events and their financial
effect on an organization.

B.Accounting as an Aid to Decision Making

1. Accounting information is useful to anyone who
must make decisions that have economic
consequences. Managers, owners and investors
all use accounting information to make
decisions.
2. Accounting information may be used to help
predict future effects of decisions, confirm or
reject, by evaluating performances or by
indicating the financial implications of choosing
one plan over another.

Inst: Dr. Mohammed Yousuf Khan 3

Lecture Notes: Business Decision Making, SAB, BBA -2

C.Financial and Management Accounting

1. Financial and managerial accounting uses

financial data related to a particular entity, and
share many of the same accounting procedures.
The difference between the two is their use by
different types of decision makers.
2. Managerial accounting serves internal (inside)
decision makers.
3. Accounting, through financial statements,
performs a scorekeeping function. It answers
the questions of: What is the financial picture of
the organization on any given day? How well
did it do during a given period?
4. There are three major financial statements:
The balance sheet focuses on the financial
picture as of a given day.
The income statement
The statement of cash flows focus on
performance over time.
5. The annual report is a document prepared by
management and distributed to current and
potential investors to inform them about the
company’s past performance and future
prospects.

Inst: Dr. Mohammed Yousuf Khan 4

Lecture Notes: Business Decision Making, SAB, BBA -2

Components of the Balance Sheet: The Balance

Sheet

A balance sheet is what accountants call a

financial statement. The balance sheet shows
the financial position of a business at a
particular point in time. It is also known as the
statement of financial position or statement of
financial condition. A typical balance sheet
might appear as shown in the following Figure:

As you can see, the balance sheet has two counter-

balancing sections, which form the accounting
equation:

Assets = Liabilities + Owners’ Equity (i.e. Net Worth)

Inst: Dr. Mohammed Yousuf Khan 5

Lecture Notes: Business Decision Making, SAB, BBA -2

Example
Consider the following business activities or events
of a typical firm:
- the firm owned assets of $100,000
- the firm owed creditors $80,000 (i.e. liabilities)
- the firm owed the owner $20,000 ( i.e. net worth)

The accounting equation would be:

Assets = Liabilities + Owners' Equity
$100,000 = $80,000 + $20,000

We shall call any business event that changes the

amount of assets, liabilities, or owners' equity a
business transaction.

Practical Test
1. Given any two known elements of the
accounting equation, the third can be logically
computed. Determine the missing amount in
each of the accounting equations below.
Assets = Liabilities + Owners' Equity

1) $7,200 = $2,800 + $______

2) $7,200 = $_____ + $4,400

3) $_____ = $2,800 + $4,400
4) $20,000 = $5,600 + $______

Inst: Dr. Mohammed Yousuf Khan 6

Lecture Notes: Business Decision Making, SAB, BBA -2

5) $18,000 = $_____ + $6,600

6) $_____ = $4,280 + $8,420

2. Classify each of the following as elements of

the accounting equation using the following
abbreviations: A=Assets; L=Liabilities;
C=Capital.

1) Cash
2) Accounts payable
3) Owners' Investment
4) Accounts receivable
5) Land

It is the competitive pressure which force

corporate managers to make good decision to
improve profitability for their business survival.

For this, manager seeks any strategies to give their

companies the competitive advantage. Most of
these strategies involve computers and
information technology (IT). The intelligent use of
available technology and information’s can make
the difference between profitability and failure.

IT can give a company ready access to a world

market, improve product and service quality,
reduce cost, increase productivity, aid

Inst: Dr. Mohammed Yousuf Khan 7

Lecture Notes: Business Decision Making, SAB, BBA -2

communication between employees and hence

improve company morale.

Decision making at manager levels:

The main job of the manager is to increase the

efficiency/productivity by creating more
sophisticated reports.

The manager must use all the resources at their

disposal to meet the objectives and perform the
management function of planning, organizing,
leading and controlling. The corporate resources
for the manager are money, materials (including
facilities and equipment), people and information.
All these resources become input to various
functional units.

Management Information System (MIS):

MIS increases the efficiency of the managerial

activity. It manipulates the data received from
transaction processing system and creates the
managers specific required reports. MIS is a set of
S/W tools that enable manager to gather
information about a department or entire

Inst: Dr. Mohammed Yousuf Khan 8

Lecture Notes: Business Decision Making, SAB, BBA -2

organization. Different level of MIS produces

several different types of reports.

The manager can make two type of decision at this

stage:
• A routine decision: is one that is made
regularly repeatedly. For example, a monthly
decision about what to order to re-stock
inventory.
• A structured decision: is one that has a clear
and replicate method for reaching a solution.
For example, figuring out, which customer
should receive overdue notices?

Consider an example of an air line MIS.

An airline MIS does much more than keep
track of flight information’s.

• It closely monitors departure and arrival

times so that ground crew activities can be
coordinated.
• Complies and produces many kind of
information needed by the management like:

- The number of passenger miles flown

- Profit per passenger on a particular flight
- Average number of empty seats

Inst: Dr. Mohammed Yousuf Khan 9

Lecture Notes: Business Decision Making, SAB, BBA -2

- Percent of arrivals on time etc.

Inst: Dr. Mohammed Yousuf Khan 10