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Accounting - Three Major Areas
There are three main functional areas in accounting, which should be considered in modern day accounting for any business. The three are monetary, value and administration accounting.
The primary area, namely monetary accounting, is primarily helpful for ascertaining the results of the business on a periodical basis; for instance, one year. This will assist to determine the future course of action in the long term. In economical phrases, financial accounting treats cash as a factor of production.
Value and administration accounting are tools to enable administration to take choices on a day-to-day basis. Value and management accounting are not helpful for his or her own sake. These two functions help administration in the conduct of the enterprise alongside with different key factors involved in running of the business. Key factors could possibly be demand, provide, competition, availability of raw materials, logistics etc.
The second space, namely value accounting, seeks to determine the value of direct costs and indirect prices concerned in production . From this worth, management can make an knowledgeable decision relating to the improvement of production performance. In economic terms, cost accounting is a measure of financial performance. This data gives administration a transparent indication of financial performance of the production resources of the business.
Costing also helps the sales manager in setting prices. But since costing is a measure of financial efficiency, it cannot be considered as a completely accurate basis for setting prices. This is because selling costs are more of an financial decision. It will not be amiss to say here that prices depend basically on market factors. Costs rely more on demand, provide and competition and less on costs. For example, high demand coupled with lack of competition would imply that business may charge higher costs for its products, well above the costs.
The third space, namely management accounting, is carefully interrelated with costing accounting. Although it has developed from price accounting, management accounting has a broader function to play in administration decisions. It measures financial performance of the business enterprise as an entire, vis-a-vis the economic surroundings in which the enterprise operates. This function of accounting seeks to mix the monetary and value information in a broader aspect.
Finally, administration accounting is instrumental in helping and advising management in making necessary business decisions. It makes administration aware of the economic implications and penalties of their decisions. In economic terms, it implies a detailed research of money as an economic resource, while concurrently treating it as a measure of financial performance. This enables management to measure it as an economic factor of production, e.g. the rate of return on capital employed.
It is thus seen that accounting has a distinct function to play in three completely different areas, which are equally vital. With the advent of computerised accounting, it has become very straightforward for management to monitor the accounting data on the ideas of its fingers. Financial accounting programs enable financial statements and various cost and MIS statements to be produced virtually immediately at push of a button. Now, only the laborious part of accounting is data entry. Financial managers should make sure that significant data is input into the system to produce meaningful information. Proper categorisation must be accomplished and keying errors prevented in any respect costs, making certain providing accurate monetary data to management.
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