Revision:AQA A2 Business Studies Unit 4 - Limitations of Accounts

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Find out why accounts are important

Accounts are important because they display the financial information of a business to all interested parties. Balance sheets are important as they show, at any given moment, the financial standing of a business and can be useful for those interested in investing in the business. Profit and loss accounts give details of how well the business is performing, or did perform, over a given period. Cash flow statements show the money going in and out of a business and therefore are important in giving stakeholders an indication of what the business is spending money on.

Find out who uses accounts and why

A businesses account could be used by a huge variety of people. Firstly, the businesses manager would want to use accounts as a way of checking on the progress being made by the company and ensuring that targets are set that are in line with the performance and that any necessary adjustments to business performance can be made. Employees would use accounts to gauge whether or not they would be able to ask for a pay rise, whether there is long term stability in the business and therefore long term stability in their jobs, and to see if any potential financial problems are looming.

Competitors would also look at business X’s accounts as a way of judging the strength of the competition in a market place. A strong profit and loss account for a competitor would not be a good sign for a company in serious trouble in the same market place because it could be an opportunity for a takeover. This is another reason that competitors use accounts, so that they can see opportunities for takeovers of other companies and so that they can identify the problem areas from an early stage.

Shareholders (and potential shareholders) would use accounts to judge the position of their investments and whether or not it is advisable for them to keep their investments or whether problems may be coming and therefore now might be a good time to sell up.

One stakeholder that would certainly need to use and see a businesses accounts would be an investor (be that a bank or private individual). They would want to see that fixed assets are in place that could be sold therefore covering the investment they are making and reducing the risk that is involved. Furthermore they would wish to see a low gearing ratio showing that the business does not already have too many loans and therefore is on sound financial ground.

What do accounts not cover?

Accounts only state what has happened in terms of financial gains, losses and changes. They do not, generally speaking, have specifics as to where the stock is bought from, therefore the loss of a valued supplier will be omitted with nobody any the wiser.

Accounts do not detail the labour turnover or the specifics of pay for those other than the most senior people involved in the business. There is no discussion in accounts as to what economic factors have had an impact and the effectiveness of any of the purchases.

Find out why, despite their limitations, financial accounts are important

Despite the fact that there are severe limitations with accounts they are still important. They give the best insight available into a company’s finances and therefore this can be used as a tool by which to judge the performance of the business. Window dressing may cover up the worst bits of accounts but it is probable that most accounts give a fairly accurate picture of the business. They are a very useful tool in decision making processes but, due to their unreliability, they cannot be the sole factor in any decision if total accuracy is desired.

Also See

Read these other AQA A2 Business Studies Unit 4 revision notes:

• Privatisation
• SWOT Analysis of the UK
• Balance Sheets
• Limitations of Accounts
• Profit and Loss Accounts
• Revenue and Capital Expenditure
• Market Analysis and Decision Making
• Marketing Maths
• Marketing Objectives and Decision Making
• Marketing Budgets
• Corporate Planning
• Management of Change
• Invention, Innovation and Design
• Network and Critical Path Analysis
• Business and the Law
• Employee Participation
• Human Resource Management
• Performance Measurement

Comments

These notes are aimed at people studying for AQA A2 Business Studies Unit 4, but will also be suitable for other courses and exam boards.

Originally submitted by eksman on TSR Forums.