ACCOUNTING LANGUAGE, ART AND SCIENCE

Accounting Is the Language of Business

Every business organization that has economic resources, such as money, machinery, and buildings, uses accounting information. For this reason, accounting is called the language of business.

Accounting is considered an art

It requires the use of skills and creative judgment. One has to be trained in this discipline to be able to perform accounting functions well.

Accounting is also considered a science

It is a body of knowledge.

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EXTERNAL COSTS AND EXTERNAL BENEFITS

External costs An external cost occurs when producing or consuming a good or service imposes a cost (negative effect) upon a third party. If there are external costs in consuming a good (negative externalities), the social costs will be greater than the private cost. The existence of external costs can lead to market failure. This is because the free market generally ignores the existence of external costs. External marginal cost (XMC) the cost to a third party from the consumption/production of one extra unit. Example of External Cost Driving a car imposes a private cost on the driver (cost of petrol, tax and buying car). However, driving a car creates costs to other people in society. These can include: Greater congestion and slower journey times for other drivers. Cause of death for pedestrians, cyclists and other road users. Pollution, health-related problems. Noise pollution. Example of Production External Cost Producing electricity from burning coal leads to air ...

FREE TRADE

Benefits of free trade Free trade means that countries can import and export goods without any tariff barriers or other non-tariff barriers to trade. Essentially, free trade enables lower prices for consumers, increased exports, benefits from economies of scale and a greater choice of goods. In more detail, the benefits of free trade include: 1. The theory of comparative advantage This explains that by specialising in goods where countries have a lower opportunity cost, there can be an increase in economic welfare for all countries. Free trade enables countries to specialise in those goods where they have a comparative advantage . 2. Reducing tariff barriers leads to trade creation Trade creation occurs when consumption switches from high-cost producers to low-cost producers. The removal of tariffs leads to lower prices for consumers (Prices fall from P1 to P2) This fall in prices enables an increase in consumer surplus of areas 1 + 2 + 3 + 4 Imports will increase from Q3-Q2...

THE ROLE OF PROFIT IN AN ECONOMY

WHAT IS A PROFIT? Profit is the surplus revenue after a firm has paid all its costs. Profit can be seen as the monetary reward to shareholders and owners of a business. In a capitalist economy, profit plays an important role in creating incentives for business and entrepreneurs. For an incumbent firm, the reward of higher profit will encourage them to try and cut costs and develop new products. If an industry is profitable, it will encourage new firms to enter. If a firm becomes unprofitable, it will either have to adapt and change or close down. This profit motive can help increase efficiency, provide greater choice for consumers and allocate resources according to consumer preferences. However, profit can have a downside. To increase profits, firms may take action which cause market failure . For example, an asset stripper could buy a failing firm – selling off its assets and then make workers redundant. Alternatively, a firm may increase profits by finding ways around environme...

Scarcity

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