Accounting is one of the most important pillars of business. Accounting is also called “the language of business” because it gives helpful information to investors, businessmen, owners and managers to assess any company’s or business’s performance. According to one of the most successful investors in the world, Warren Buffet, “the best way to prepare to be an investor is to learn all the accounting you can”.
It is important to keep records of expenses and revenues by using different accounting systems and methods. There is a continuous change going on in accounting systems and methods. It is really easy to collect numbers and save them. Still, it isn’t easy to interpret those numbers meaningfully and convey those findings to others so they can understand easily. It is impossible in today’s world to run a business with accounting.
Essay on Accounting
In most companies, accounting systems and methods follow managerial accounting. Companies where the assembly line is installed mostly use traditional accounting.
Traditional accounting has a different cost system, which accounts for labor directly and indirectly. Traditional accounting is very handy for small businesses and those that do not require custom design accounting.
However, the modern world does not rely on labor and machines that are not running 24 hours a day to produce better results. Instead, businesses are relying on technological changes and fast inventory turnover for better results.
Businesses, where machines are heavily used for a longer period, find it difficult to use traditional accounting to keep records of costs and revenues.
Companies usually face problems in traditional accounting in recording performance measures and keeping pace with competitors; businesses are changing their accounting systems with changing practices.
Businesses are becoming more particular and leaner nowadays. For more accurate results for decision-makers, “lean accounting” has been adopted by businesses.
Traditional Accounting
In a traditional accounting system, the cost is apportioned to manufacturing overhead (including indirect manufacturing cost) to units produced.
The cost of a product is calculated by adding the direct material and direct labor cost, termed ‘prime cost.’ The Unit produced is the foundation for charging the overhead cost for a product. Administration cost is not included in the indirect labor cost of a product.
One of the biggest disadvantages companies face when using traditional accounting systems is using direct labor hours to calculate the cost of goods sold (COGS).
Nowadays, the world is moving too fast and changing at a rapid pace, which also changes the environment of industries. Machines have replaced humans, and the need for humans has decreased greatly.
This is one of the main reasons that traditional accounting systems are becoming obsolete companies; they do not charge or take into consideration machine hours and the cost of producing a product.
