Financial Accounting Information

Three Major Areas of Accounting

Major area of accounting information predictive usefulness research in the last three decades has concerned the predictive ability of accrual and cash flow information. There are three major functional areas in accounting, which require to be thought in latest day accounting for any business.  The three are financial, cost and management accounting.

The first area, namely financial accounting, is principally functional for finding the results of the business on a periodical basis; for case, one year.  This will assist to determine the prospective course of action in the long term.  In economical terms, financial accounting treats money as a factor of production.

Cost and management accounting are tools to enable management to take decisions on a daily basis.  Cost and management accounting are not useful for their own sake.  These two purposes serve management in the lead of the business along with other key factors involved in running of the business.  Key factors could be need, supply, competition, accessibility of raw material, logistics etc.

The second area, namely cost accounting, seeks to ascertain the rate of direct costs and indirect costs required in production.  From this value, management can get a wise decision considering the improvement of production performance.  In economic terms, cost accounting is a measure of economic performance.  This information gives management a complete indication of economic performance of the production resources of the business.

Costing also assists the sales manager in setting prices.  But since costing is a measure of economic performance, it cannot be taken as a perfectly accurate basis for adjusting prices.  This is because marketing prices are more of an economic conclusion.  It would not be amiss to refer here that prices count fundamentally on market factors.  Costs depend more on demand, supply and competition and less on costs.  For illustration, high demand integrated with deficiency of competition would mean that business could charge higher prices for its products, easily above the costs.

The third area, namely management accounting, is closely interrelated with costing accounting.  Although it has acquired from cost accounting, management accounting has a broader role to play in management conclusions.  It values economic performance of the business enterprise as whole, counterparts the economic environment in which the business operates.  This function of accounting seeks to combine the financial and cost information in a larger aspect.

Lastly, management accounting is helpful in helping and suggesting management in taking important business decisions.  It makes management sensible of the economic implications and consequences of their decisions.  In economic terms, it implies a close study of money as an economic resource, while simultaneously treating it as a measure of economic performance.  This enables management to measure it as an economic factor of production, e.g.  The value of return on primary utilized.

It is thusly found that accounting has a various role to play in three different areas, which are equally important.  With the coming of computerized accounting, it has turned very easy for management to supervise the accounting data on the tips of its fingers.  Financial accounting programs enable financial statements and various cost and MIS statements to be produced nearly instantly at press of a button.  Now, only the laborious part of accounting is data entry.  Financial managers must check that meaningful data is input into the system to produce meaningful information.  Proper categorization must be done and identifying errors avoided at all costs, ensuring providing accurate financial information to management.

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