There are three major functional areas in accounting, which have to be considered in modern-day accounting for any business. The three are monetary, value and management accounting.
The first area, namely financial accounting, is primarily useful for ascertaining the results of the business on a periodical foundation; for example, one year. This will help to determine the future course of action in the long term. In economical terms, monetary accounting treats cash as a factor of production.
Value and administration accounting are tools to enable administration to take decisions on a day-to-day basis. Value and management accounting are usually not helpful for their own sake. These two capabilities assist management in the conduct of the enterprise alongside with different key factors involved in running of the business. Key factors may very well be demand, supply, competition, availability of raw material, logistics etc.
The second area, namely price accounting, seeks to ascertain the worth of direct costs and indirect costs concerned in production . From this worth, management can make an informed determination regarding the improvement of production performance. In economic terms, cost accounting is a measure of economic performance. This data offers management a clear indication of financial efficiency of the production resources of the business.
Costing additionally helps the sales manager in setting prices. However since costing is a measure of economic performance, it cannot be considered as a fully accurate foundation for setting prices. This is because selling prices are more of an financial decision. It will not be amiss to say here that costs rely basically on market factors. Prices rely more on demand, supply and competition and less on costs. For example, high demand coupled with lack of competition would imply that business might cost higher costs for its products, well above the costs.
The third area, namely administration accounting, is carefully interrelated with costing accounting. Though it has advanced from cost accounting, administration accounting has a broader function to play in administration decisions. It measures economic efficiency of the business enterprise as a complete, vis-a-vis the financial setting in which the enterprise operates. This operate of accounting seeks to mix the monetary and cost data in a broader aspect.
Finally, administration accounting is instrumental in helping and advising administration in making essential business decisions. It makes management aware of the financial implications and penalties of their decisions. In financial phrases, it implies a close study of cash as an financial 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 position to play in three totally different areas, which are equally vital. With the advent of computerised accounting, it has develop into very easy for administration to monitor the accounting information on the information of its fingers. Monetary accounting programs enable monetary statements and numerous value and MIS statements to be produced virtually immediately at push of a button. Now, only the laborious part of accounting is data entry. Monetary managers must be certain that significant data is enter into the system to produce meaningful information. Proper categorisation have to be carried out and keying errors avoided in any respect costs, ensuring providing accurate financial information to management.
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