Introduction to the context of accounting
Introduction to the context of accounting

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Introduction to the context of accounting

6 Accounting and the objectives of the firm

6.1 Variety of business objectives

Most people would agree that the primary objective of a business is to survive and, in order to survive, its revenue must be greater than its expenditure.

Activity 13

What other objectives do you think a business may have? Take a minute to write down at least four.

Answer

Here are some possible objectives for a business you may have considered:

  • to ensure that profit is maximised

  • to achieve a given proportion of market share

  • to achieve and maintain a high level of quality in the goods and services it offers

  • to ensure customers are satisfied

  • to ensure full employment of employees

  • to protect the welfare of employees (through, for example, a sound company pension scheme)

  • to ensure that employees are well-trained

  • to protect the environment.

Some businesses will include some of these in their objectives, others will include more of them, others less. It is up to the management of individual businesses to decide what their objectives are, and many similar businesses will have very different objectives. In the end, people working in a business need to know what its objectives are if they are to take the correct decisions. If they don’t, decisions will be taken on the basis of the individual beliefs of the decision takers and the businesses will suffer as employees pursue different objectives.

An example would be where the person responsible for selling assumes that the business wishes to maximise market. In order to do so, selling prices are set very low. Another employee assumes the business wishes to minimise costs. In order to minimise costs, the volume of goods kept in store for sale is put to a minimum. When higher than expected orders come in for goods as a result of sales prices having been cut to boost demand, there are not enough available so the business needs to put employees onto overtime with its higher wage costs, resulting in reduced profits. If the primary objective of the business was to maximise profits, these two employees have prevented it being achieved because they made the wrong assumptions concerning the objectives of the business.

That was an example of how objectives can conflict. Let’s look at that in more detail.

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