There are three main functional areas in accounting, which must be considered in modern accounting for any business. The three are financial, cost and management accounting.
The first area, namely financial accounting, is mainly useful for determining business results on a periodic basis; for example, one year. This will help determine the long-term future course of action. In economic terms, financial accounting treats money as a factor of production.
Cost and management accounting are tools that allow management to make decisions on a day-to-day basis. Cost and management accounting are not useful by themselves. These two functions assist management in running the business along with other key factors involved in running the business. Key factors could be demand, supply, competition, raw material availability, logistics, etc.
The second area, namely cost accounting, seeks to determine the value of direct costs and indirect costs involved in production. From this value, management can make an informed decision regarding the improvement of production performance. In economic terms, cost accounting is a measure of economic performance. This information gives management a clear indication of the economic performance of the business’ production resources.
Costing also helps the sales manager to set prices. But since costing is a measure of economic performance, it cannot be considered an absolutely accurate basis for pricing. This is because sales prices are more of an economic decision. It would not hurt to mention here that prices basically depend on market factors. Prices depend more on demand, supply and competition and less on costs. For example, high demand coupled with a lack of competition would mean that companies could charge higher prices for their products, well above cost.
The third area, namely management accounting, is closely related to cost accounting. Although it has evolved from cost accounting, management accounting has a broader role to play in management decisions. It measures the economic performance of the business enterprise as a whole, against the economic environment in which the business operates. This function of accounting seeks to combine financial and cost information in a broader aspect.
Finally, managerial accounting is essential to help and advise management in making important business decisions. It makes management aware of the economic implications and consequences of its decisions. In economic terms, it implies a detailed study of money as an economic resource, while treating it as a measure of economic performance. This allows management to measure it as an economic factor of production, for example, the rate of return on capital employed.
Thus, accounting is seen to have a distinct role to play in three different areas, which are equally vital. With the advent of computerized accounting, it has become very easy for management to monitor accounting information at their fingertips. Financial accounting programs allow financial statements and various cost and MIS statements to be produced almost instantly with the push of a button. Now, only the laborious part of accounting is data entry. Financial managers must ensure that meaningful data is entered into the system to produce meaningful information. Proper categorization must be carried out and typing errors must be avoided at all costs, ensuring the provision of accurate financial information to management.