18 CHAPTER 1 INTRODUCTION TO ACCOUNTING
more comparable and transparent and that the financial reports provide a more faithful por-
trayal of economic reality.
Management accounting has also changed by becoming more outward looking in its
focus. In the past, information provided to managers has been largely restricted to that col-
lected within the business. However, the attitude and behaviour of customers and rival busi-
nesses have now become the object of much information gathering. Increasingly, successful
businesses are those that are able to secure and maintain competitive advantage over their
rivals.
To obtain this advantage, businesses have become more ‘customer driven’ (that is, con-
cerned with satisfying customer needs). This has led to the production of management
accounting information that provides details of customers and the market, such as customer
evaluation of services provided and market share. In addition, information about the costs
and profits of rival businesses, which can be used as ‘benchmarks’ by which to gauge com-
petitiveness, is gathered and reported.
To compete successfully, businesses must also find ways of managing costs. The cost
base of modern businesses is under continual review and this, in turn, has led to the develop-
ment of more sophisticated methods of measuring and controlling costs.
ACCOUNTING FOR BUSINESS We have seen that the needs of the various user groups will determine the kind of accounting
information to be provided. Those needs, however, will partly be shaped by the forms of busi-
ness ownership and the ways in which a business is organised and structured. In the sections
that follow, we shall consider the business environment within which accounting information
is produced. This should help our understanding of points that crop up in later chapters.
WHAT IS THE PURPOSE OF A BUSINESS? Peter Drucker, an eminent management thinker, has argued that ‘the purpose of business is
to create and keep a customer’ (see Reference 3 at the end of the chapter). Drucker defined
the purpose of a business in this way in 1967, at a time when most businesses did not adopt
this strong customer focus. His view, therefore, represented a radical challenge to the
accepted view of what businesses should do. More than fifty years on, however, his approach
has become part of the conventional wisdom. It is now widely recognised that, in order to
succeed, businesses must focus on satisfying the needs of the customer.
Although the customer has always provided the main source of revenue for a business,
this has often been taken for granted. In the past, too many businesses have assumed that
the customer would readily accept whatever services or products were on offer. When com-
petition was weak and customers were passive, businesses could operate under this
assumption and still make a profit. However, the era of weak competition has passed. Now,
customers have much greater choice and are much more assertive concerning their needs.
They now demand higher quality services and goods at cheaper prices. They also require that
services and goods be delivered faster with an increasing emphasis on the product being
tailored to their individual needs. If a business cannot meet these needs, a competitor often
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WHAT KINDS OF BUSINESS OWNERSHIP EXIST?
19 can. Thus, the business mantra for the current era is ‘
the customer is king ’. Most businesses
recognise this fact and organise themselves accordingly.