Accounting Articles

The Three Main Functions of Accounting

Posted on: October 8, 2008

There are three main functional areas of accounting which need to be considered in modern day accountancy for any business. The three areas are, cost, finance and management accounting.

The first area, financial accounting, is used mainly for ascertaining the results of any such business on a periodic basis, for i.e. 6 months. This should as a result; help the company determine the future course of action, in the long term. From an economic perspective, financial accounting treats money as a factor of production.

Management and cost accounting are apparatus used to help management make decisions on a day to day basis. Management and cost accounting aren’t useful simply for their own sake. These two functions help management conduct themselves along with other vital factors involved in the running of a business. Other key factors could be supply, demand, competitors, availability of raw materials, logistics etc.

The second area is cost accounting, its primary purpose is to attain the value of direct and indirect costs involved in production. From the value acquired, management can make an informed decision on improvement in production performance. From an economic perspective, cost accounting is the measurement of economic performance. Thus, this information gives management a clearer indication of the performance of the product resources in the business.

Costing also helps the sales manage in setting the correct price. But, because costing is solely a measurement of economic performance, it can not be considered as an accurate basis for setting prices. This is because selling prices is more of an economic decision. It would not be wrong for me to mention that pricing is basically determined by market factors. Prices are influenced mainly by demand, supply and competition, less on costs. For i.e. high demanded plus lack of competition would result in the business charging higher prices for its product, well above the costs.

The third area is management accounting, which is related closely to cost accounting. Although it has essentially evolved from cost accounting, management accounting plays a much broader role in management decisions. It measures the performance, economically, of the whole business, vis-à-vis the economic environment that the business operates in. This area of accounting, seeks to combine both financial and cost information into a much broader function.

Lastly, management accounting, this area is instrumental in advising and assisting management in making vitally important business decisions. It essentially makes management more self aware of the economic implications and consequences of decisions made. From an economic perspective, it looks at the study of money as an economic resource, while at the same time, treating it as a measure of economic performance. This allows the management to measure it as an economic factor of production, for i.e. the rate of return on capital employment.

It is then seen that accounting plays a vital role in three distinct areas, which are equally as important. With the advent of computerised accounting, it has made it much easy for management to monitor the accounting information. Financial accounting software, allows you to make financial statements and various cost and MIS statements almost instantly with just one push of a button, the only laborious aspect of accounting is data entry. A financial manager must bring it upon himself or herself to make sure that meaningful data is input into the system. Proper categorisation must be done and all key based errors avoided, in order to ensure management is receiving accurate financial information.

Related Resource: Accountancy

About the Author
Uchenna Ani-Okoye is an internet marketing advisor


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