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Basic Concepts of Accounting and Manufacturing

Basic Concepts of Accounting and Manufacturing

In this article, we will talk about accounting, manufacturing, basic concepts of accounting, basic concepts in manufacturing, and the manufacturing process.

According to the American Accounting Association, accounting is the procedure of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users for information. It is a process that begins with the identification of transactions and ends with the preparation of financial statements. 

Manufacturing is the planning and processing of raw material into finished goods in the best possible way, through the use of tools, people, capital, processes, systems, and enterprises to add value to society. 

Accounting in Relation to Manufacturing

Accounting in relation to manufacturing refers to the cost accounting of the area that affects the operations of production and the value of inventory. These activities not only increase the profits of the business but only increase the accounting standards of the manufacturing business. These include- 

Inventory Valuation

It refers to the complete cost of inventory at the end of the accounting period. It is of less use in daily operations of the manufacturing process. However, it involves a lot of time and effort as the company’s external auditors check this thoroughly. Examples of inventory methods are FIFO, LIFO, etc. 

Cost of Goods Sold

This refers to tracking the cost of a specific production or the general cost of all units produced. It is used to track those costs that change due to changes in revenue or to track factory overhead costs. 

Constraint Analysis

It is used to find a constraint in the manufacturing process and advise the production department regarding its impact. It includes the study of the inventory buffer near the bottleneck and the presence of any upstream sprint capacity.

Margin Analysis

It refers to the subtraction of the cost associated with a product from product revenues to find the margin of each product. It is also used in customer lines, product lines, business units, and distribution channels. 

Variance Analysis

It refers to comparing actual cost with the standard cost and examining the reasons for deviation.

Budgeting

All the analyses are used to form an annual budget, which is the responsibility of the production manager. 

Basic Concepts of Accounting

The basic concepts in accounting are the fundamental ideas that form the foundation of the accounting processes. The major concepts are mentioned below:

Business Entity Concept

This concept assumes that a business is a separate entity from its owners and should be treated so. All the books of accounting and financial statements will be distinct from the owners. The business and owner will be treated as two different entities. 

Money Measurement Concept

This concept states that only the transactions that can be expressed in terms of money should be recorded in the book of accounts. The records should be kept in the monetary unit. However, as the value of money keeps changing and the value used in the books of accounts is the original, rigid value, the accounting data does not convey the true value of an enterprise. 

Going Concern Concept

This concept assumes that a business will continue to carry out its operations indefinitely or for a very long time and will not be liquidated shortly. 

Accounting Period Concept

The accounting period is a period at the end of which the firm prepares financial statements. It is common and mandatory for firms to follow this accounting period and prepare financial statements at regular intervals. 

Cost Concept

This concept states that all assets should be recorded in the account books at tier cost price that includes purchase price, transportation, installation, and making it ready for use. It is historical and does not change over time. 

Dual Aspect Concept

This concept states that every transaction has a dual effect and should be recorded at two places. This is the core concept of accounting. 

Revenue Recognition Concept

This concept states that revenue from a business transaction should be recorded in the books of accounts only after it is realised. No prior assumptions should be made. 

Matching Concept

This concept assumes that expenses incurred during an accounting period should match the revenue generated during that period. 

Full Disclosure Concept

This concept states that all the relevant and material facts related to a business entity must be disclosed fully in the books of accounts, financial statements, and their footnotes.  

Consistency Concept

This concept states that all the accounting practices and policies followed by the business should be consistent and in order. 

Conservatism Concept

This concept states that while ascertaining the income and profit of an entity, the accountant must be frugal. If the profit is assumed generously and the real income is comparatively less, it will hurt the capital of the entity.  

Materiality Concept

This concept states that only the material facts that contribute to the income should be recorded and presented. 

Objectivity Concept

This concept states that the recording of the transactions would not be subjective and biassed but rather objective and clinical.

Basic Concepts of Manufacturing

The major concepts of manufacturing are mentioned below:

Just-In-Time Manufacturing

Under this concept, the product is manufactured with just enough quantity to meet the demands of the customers. It produces low waste and is less risky. It also saves a lot of money as the waste is reduced and the hassle of warehousing is avoided. 

Repetitive Manufacturing

Under this concept, the same product is manufactured 24/7 in bulk quantity. 

Discrete Manufacturing

Under this concept, manufacturing is done 24/7, but the finished products vary by a significant margin. 

Custom Manufacturing

Under this concept, the products manufactured are customised, catering to the specific needs of the customers.

Continuous Manufacturing

Under this concept, products that are complex and require different manufactured parts to be assembled are made. This concept is relatively new and is based solely on demand for the product. 

Cost Manufacturing

Under this concept, the products that are manufactured are cost-effective. 

Manufacturing Process

There are the 4 types of manufacturing processes:

Machining

Machining is the procedure of processing raw material into finished goods by using tools. The tools used are powerful enough to shape and cut the raw material. They make up the foundation of the industry. 

Joining

Under this process, specific design needs are met by bolting and welding the joints. Welding is preferred here as it is cost-effective and reduces excess weight. 

Forming

Under this process, processing of raw materials is done not by cutting but by re-forming and moulding them into desired products. 

Casting

This is a chemical process. Under this process, a solid is dissolved into a liquid, heated at a particular temperature, and then poured into a mould. 

Conclusion

Accounting and manufacturing are two very different processes with different concepts. Accounting concepts form the basis of fundamental accounting principles. Manufacturing concepts, on the other hand, decide the best way of processing raw material into finished goods. There are thirteen major accounting concepts and six manufacturing concepts.