Accounting is known as the language of business. It communicates operational
result of business to various interest groups, such as, owners, managers,
employees, creditors, consumers, government and general public. Financial
Accounting and Cost Accounting are two types of Accounting.
Financial Accounting is concerned with recording of day-to-day financial
transactions, calculation of income, determination of assets owned and amount
owed by the business.
It helps in managing finance, production, and distribution and
administration but' fails to provide information on the level of efficiency
achieved by business in different functional areas.
Profit is the motive behind all business operations. It is the excess of
benefits obtained over the sacrifices made by the business in monetary terms.
Former is known as revenue arid the latter is cost. In the present day of
competitive business scenario, revenue is the outcome of market forces and the
business has little scope to maneuver the same to its advantage.
The alternative left with the business to enhance profit is to control and reduce
cost. Financial Accounting has no scope to provide information for the best use
of the alternatives available to the business to control and reduce cost to get
higher profit.
Expenditure is incurred for the day-to-day activities of the business. Fluctuation
in expenditure affects profitability. It has to be reduced and controlled to
increase and maintain profitability. Financial Accounting fails to provide
information regarding expenditure incurred for each product, job, department,
process, etc. Limitations of financial accounting are as follows:
The Institute of Cost and Management Accountants (ICMA), London f defines
cost as "The amount of expenditure (actual or notional) incurred on a
attributable to a given thing". Actually, cost represents a sacrifice a
foregoing or release of something of value for a product or service.
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