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Return on investment is important in both financial accounting and management accounting.
Financial accounting, which is concerned with the financial standing and governance of the organisation, uses return on investment to record the monies paid to investors who finance the organisation through loans. It also records payments received by the organisations for loans it makes to outside organisations.
In management accounting, which is concerned with the day-to-day financial component of management decision-making, return on investment is important for assessing the financial viability of a proposed investment and for comparing alternative investment options in order to choose the one most financially viable. A number of methods are available to support these decisions, and non-financial managers need to be aware of them and their interpretation when deciding on new developments and projects.
It is important for managers to have a basic understanding of key finance concepts and knowledge of management accounting processes to support their decision-making skills. Employees should also understand basic financial concepts and a balance sheet so that they can understand the financial goals and objectives of the organisation.
Finally, it’s important to consider that when taking a decision from a financial perspective there may be non-financial considerations that carry equal or greater weight.
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