Comparative Analysis of Economic and Accounting Fundamentals in Correlation with Commercial Success
For a true commercial juggernaut to exist, it is imperative that these fully developed economic theories be utilized in association with unvarying accounting principles. Despite the innumerable amounts of arguments that may arise between a pure Accountant and a pure Economist on certain topics, the two fields of study are severely supplementary to one another. The reason I have researched the discussed topics in this paper is to prove the importance of understanding both the fundamentals of economics and accounting.
Now-a-days, students who choose to focus on one particular practice are missing out on an entire realm of requirements to form a fully functional business. Those students who declare a Business major with the intention of becoming a successful business owner will need more than just ambition to drive them to their goal. It is crucial for any business owner to know every single aspect of accounting principles in order to operate their founded establishment. Likewise, that same business owner must also be familiar with microeconomic principles in order to resourcefully target their desired consumers.
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It has been over a century now that citizens from a variety of countries have been flocking to the United States for the same exact motive: to better their livelihood through the economic benefits provided by the nation. In the past century, a majority of these peoples set foundations for themselves by gradually starting up their own personal businesses. Whether it be a small business or a large wholesaling company, the success of these personal endeavors solely depend on the organization of that business, combined with the appellation they exhibit to the public consumers.
In modern days, those individuals who strive to accomplish their unique goal are faced with the same exact tasks: To ensure the satisfaction of their buyers’ desires. It is the proper motivation and organization of the business entity that renders it successful. The only way to ensure a consumer’s complete satisfaction is by maintaining an efficient business model; this model should consist of a variety of applications derived both from the fundamentals of Economics and Accounting. In the early 20th century, those business owners who set their oundations in the “land of opportunity” were only vaguely familiar with the concepts of economics, let alone accounting. During this neonatal period of American commerce, businesses were incorporating only a fraction of the ideologies expressed by Economics; the only accounting principles present was the calculation of losses and gains. There were no formal reports dictating each and every expense incurred by the business: everything was calculated based off how much money was spent, and how much money was made.
It is not until the mid-1900s when corporations start to incorporate a majority of the essentials of economics and accounting to better their business model. Companies such as Coca-Cola and McDonald’s began targeting their consumers’ true emotions in combination with proper accounting organization in order to slowly begin expanding their magnitude. Examples such as these corporations prove that even small businesses today have a great deal of room to expand by stringently encompassing accounting principles, microeconomics, and macroeconomics into their business model.
Although the concept of economics has been utilized for numerous centuries, it is not until the past couple hundred years where theories of cause and effect for certain commercial situations have been exploited. “The term economics was originally coined by the Greek: the dictionary definition of the term translates into ‘the maintenance of a household. ’ The ancient Greek determined that the success of their “household” seemed to rely on the intangible ideology of control tied with sustainable development.  In relation to the broad spectrum of modern industries, economics refers to the management of a specified industry and how it plans on executing its objectives. Without proper maintenance, an industry has no room for expansion. It is not until the 18th century where Economists arise, marking the birth of a true social science. These “classical” economists dedicated their efforts in creating hypotheses through observations of the overlooked details of business transactions at the time. In a sense, they began to produce theories which directed the “proper maintenance” of big businesses and small businesses alike.
It is through their interpretations which present day economists have developed more proficient methods of analyzing the market demand and the targeting of particular consumers. Classical economists such as John Maynard Keynes, Adam Smith, and Jean-Baptiste Say have left behind laws and economic theories which are still exercised in modern-day business models. While some ideologies have been altered and others debated, it is evident that the underlying theses of these great minds will continue to carry on to generations of aspiring economists to come.
A celebrity in the economic world demonstrates the continuing use of classical economic ideologies-the law of demand: “When the price of a good goes up, people buy less of it, ‘other things being constant’. When the price of a good goes down, people buy more of it, other things being equal. The law of demand tells us that the quantity demanded of any commodity is inversely related to its price, ‘other things being equal. ‘ The law of demand states that a change in price causes a change in the quantity demanded in the opposite direction..
The law of demand is supported by millions of observations of people’s behavior in the marketplace. Theoretically, it can be derived from an economic model based on rational behavior. Basically, if nothing else changes and the price of a good falls, the lower price induces us to buy more over a certain period of time because we can enjoy additional net gains that were unavailable at the higher price. If you examine your own behavior, you will see it generally follows the law of demand”  (Miller – 52).
To analyze a nation’s economy, it is necessary to address attention to its fundamentals at a personal and a national level. Respectively, microeconomics and macroeconomics evaluate a country’s economic prowess at small-scale and national levels. With microeconomics, there is a primary focus on the behavior of individual consumers. By bringing attention to these consumers’ actions, a micro-economist could determine the cause-and-effect relationships between their likelihood to consume during a time of changing price and supply levels.
For example, presuming a hypothetical fast-food market, the price of one cheeseburger is equal to two dollars. The manager of the burger joint decides to reduce the price of one cheeseburger by fifty cents for one month, causing the amount of cheeseburgers sold to increase by 20 percent for that month. Clearly, this reduction in price of a cheeseburger caused an increase in total sales. Through the examining of these price changes, the economist determines that if the price level of goods drop, consumers will be more inclined to purchase that product.
It is these kinds of observations that are imperative to the success of a business, as they prove that the fluctuations in demand of a product exist. These fluctuations are especially true in modern markets, mainly due to the existence of competition. Drawing back to the law of demand, “Notice that we tacked on to the end of the law of demand the statement of ‘other things being equal. ‘ It means that when we predict that people will buy fewer DVD players if their prices go up, for example, we are holding constant the price of all other goods in the economy, as well as people’s incomes.
Implicitly, therefore, if we are assuming that no other prices change when we examine the price behavior of DVD players, we are looking at the relative price of DVD players”  (Miller 52-53). With the presence of advertising in order to appeal to the consumers of a specified market, economists must also take into consideration the effects of competitor’s expenditures which could harm a small businesses’ prosperity. Returning to the above example of the hamburger restaurant, what if the manager reduces the price of his burgers and has yet to see an increase in sales?
Are they proving a principle of microeconomics wrong? The answer is no, because microeconomics is based on a “perfectly-competitive” market. In reality, no such market exists, because there is the relentless occurrence of other businesses in a similar industry who are trying to recruit their competitors’ consumers. The micro-economist that originally observed an increase in sales after a reduction of price will now observe that the burger chain across the street is offering incentives for consumers to purchase their products.
The fact that the first burger joint reduced their prices and did not receive a boost in sales is from the existence of competition. By accounting for external influences on the success of the first burger joint, an economist could accurately determine the next sensible step it should take if they want to remain a solid contender in the market. To combat the incentives offered by their competitor, the manager of the original burger restaurant offers a free drink with every cheeseburger meal purchased. Now, the manager realizes that they have once again increased their sales through appealing offers to their original consumers.
Although the spectrum of microeconomics is extremely broad, the cause-and-effect routines of these small-scale business examples are the basis of assumptions to benefit future, similar organizations. The transactions of small businesses are not alone in the spectrum of evaluation in regards to microeconomics. The transactions of huge corporations, such as Kirkland, Inc. , are scrutinized in the same manner as the small-town burger joint. Although these dealings illustrate more cash flow and a much larger range of goods to analyze, the basis of analyzing remains the same.
Wal-Mart Stores, Inc. serves as a familiar corporation who exemplifies the application of microeconomics’ fundamentals. For example, consider the market for camping equipment; consumers are more likely to purchase camping goods closer to the summer-time. Assuming Wal-Mart is in possession of a constant supply of these goods in late May, it is incredibly likely that their selling price will rise. This would be a direct result of the upsurge of consumer demand for these products caused by seasonal transition.
With the earlier example of the cheeseburgers, competition for consumers’ attention is the primary factor instigating changes in selling price levels. Pertaining to Wal-Mart, it is evident that seasonal timing causes the demand for camping goods to increase. As a result, their price level will increase, demonstrating the accuracy of microeconomic principles. Although there are several factors that can influence a change in product supply or price level within an industry, the basic economic model of supply and demand successfully accounts for the expected fluctuations caused by business transactions.
When comparing both commercial situations, only few discrepancies can be pin-pointed regarding the manner which economics is applied. Both business entities may adjust their price level based on the amount of demand for their products. Also, for both situations, it was assumed that supply remained invariable. Though this may not be the exact scenario different markets of different goods may encounter each time, it provides for a prominent example of how to increase profitability through the satisfaction of consumers’ desires.
A simple definition of economics would be: the study of how to efficiently distribute a limited quantity of goods to satisfy all buyers’ demand for given products. This is the main focus of microeconomics with respect to minor economical transactions, but what about the neglected macroeconomics? Miller’s Economics Today defines macroeconomics as “the part of economic analysis that studies the behavior of the economy as a whole. It deals with the economic phenomena such as changes in unemployment, in the general price level of goods, and in national income”  (Miller – 3).
Despite a primary concentration on microeconomics in this essay, it is valuable for individual businesses to understand how their “small” transactions affect the nations’ “big” calculations of economic prowess. Addressing the economic concept of price index calculations, it is evident that having knowledge of how to calculate these statistics will not affect the success of business transactions at a small-scale. Obviously, these ratios deal with average changes in national price levels, which serve only as measures of macroeconomic status.
Furthermore, “The consumer price index is a statistical measure of a weighted average of prices of a specified set of goods and services purchased by typical consumers in urban areas. The producer price index is a statistical measure of a weighted average of prices of goods and services that firms produce and sell “ (Miller – 168-169). Although the “small” transactions of a given business are included in these calculations, these averages only demonstrate overall changes in price of goods over long periods of time.
While focusing on their “small” transactions, a corporation or business needs to take into consideration how they will be affecting the national market in the long-run. In order to overcome macroeconomic blunders such as high interest rates, inflation, and unemployment, “business fluctuations”  (Miller – 174) need to be slowly but constantly “expanding. ”  The likelihood of every single business in a nation to be striving for macroeconomic success is severely low, which is most likely why the capitalistic United States of America is in constant periods of recession.
In demonstration of the goals underlying this paper, most commercial bodies lay their focuses on the micro-economy instead of their national economy as a whole. It may be a shame that these entities are not working collectively to solve the macro-economic crises facing their nation, yet it is the microeconomic transactions they experience which maintain their livelihood. Corporations and small businesses alike must realize their impact on the macroeconomic well-being of the nation they reside in, due to the fact that consumers tend to react to these fluctuations, as well as those discussed earlier with regards to microeconomic transactions.
Solutions to these problems have been noted for through key assumptions made by classical economists over two centuries ago: “[Consider] a more sophisticated economy in which people work for others and money is used instead of barter. Can these complications create the possibility of unemployment? And does the fact that laborers receive money income, some of which can be saved, lead to unemployment? ‘No’ said the classical economists to these last two questions. [The following assumptions account for these macro-economic issues: Pure competition exists.
No single buyer or seller of a commodity or an input can affect its price. Wages and prices are flexible. The assumption of pure competition leads to the notion that prices, wages, interest rates, and the like are free to move to whatever level supply and demand dictate, as the economy adjusts. Although no individual buyer can set a price, a community of buyers and sellers can cause prices to adjust to an equilibrium level. People are motivated by self-interest, Businesses want to maximize their profits, and households want to maximize their economic well being.
People cannot be fooled by money illusion. Buyers and sellers react to changes in relative prices That is to say they do not suffer from money illusion. For example, workers will not be fooled into thinking that a doubling of wages makes them better off if the price level has also doubled during the same time period. The classical economists concluded, after taking account of the major assumptions, that the role of government in the economy should be minimal.
If pure competition prevails, if all prices and wages are flexible, and if people are self-interested and do not experience money illusion, then any problems in the macroeconomy will be temporary. The market will correct itself”  (Miller – 263). The intelligence of classical economists is visible today, over 200 years later. Through utilizing these four assumptions made so long ago, they have explained solutions to poor macroeconomic standings in certain market situations. The development on the theories originated by classicalists, such as J. B. Say, will be further discussed later in this essay.
A business entity in the present era may be somewhat comparable to one in the “classical era,” yet many discrepancies must be accounted for with regards to modern-day business transactions. Considering the vast amount of financing and operating activities a business or corporation undergoes within one year, it is necessary for them to efficiently maintain a systemized structure. According to Accounting Principles Vol. 1, Accounting procedures “must consist of three basic activities—identifying, recording, and communicating the economic events of an organization to interested users” (Weygandt – 1-15).
By following this procedure, any business owner is showing how successfully they have incorporated economic fundamentals into the progress of their business. The following quote from Accounting Principles, Vol. 1 analyzes PepsiCo’s financial spectrum of reported economic success: “To identify economic events, a company selects the economic events relevant to its business. Examples of economic events are the sale of snack chips by PepsiCo. Once a company like PepsiCo identifies economic events, it records those events in order to provide a history of its financial activities.
Recording consists of keeping a systematic, chronological diary of events, measured in dollars and cents. In recording, PepsiCo also classifies and summarizes economic events. Finally, PepsiCo communicates the collected information to interested users by means of accounting reports. The most common of these reports are called financial statements. To make the reported financial information meaningful, PepsiCo reports the recorded data in a standardized way. It accumulates information resulting from similar transactions.
For example, PepsiCo accumulates all sales transactions over a certain period of time and reports the data as one amount in the company’s financial statements. Such data are said to be reported in the aggregate. By presenting the recorded data in the aggregate, the accounting process simplifies a multitude of transactions and makes a series of activities understandable and meaningful. A vital element in communicating economic events is the accountant’s ability to analyze and interpret the reported information.
Analysis involves use of ratios, percentages, graphs, and charts to highlight significant financial trends and relationships. Interpretation involves explaining the uses, meaning, and limitations of reported data. ”  The importance of this recording process is extremely blatant: without these reports, PepsiCo would have no means of viewing their economic development. These accounting reports convey every minor detail of every single process the company’s goods undergo: from their birth as raw materials, to their death as sold finished goods.
By keeping track of these miniscule processes, PepsiCo is able to monitor their growth through comparative analyses of current year and past years’ reports. It is at this point where the vitality of a sewed Economic and Accounting model becomes prominent; a focus in only one field of analysis is almost useless to a business seeking sustainable growth. Assume that a business emphasized economic fundamentals such as laws of supply and demand to better their success.
They have figured out how much of a given product to produce, when to sell it, and how to target their specified consumers. In hindsight, this would seem to render profitability for this business. Now assume that they left a handful of minor details out of their financial reports; pretend they only calculated what their expenses and revenues turned out to be. Despite the profit gained through the incorporation of economic principles, the minor details left out of these financial reports will hurt the commercial entity in the long run.
Though they will have a record of their gains and losses, it is the minor expenses and details not accounted for that will hinder further growth of the business. It is necessary to have all minor processes accounted for, because the corporation will know exactly what steps to follow in order to generate an equal or better income during the following fiscal year. The following is an example of organized accounting on behalf of a manufacturing company, shown through a balance sheet: “Current Assets: Cash, $180,000. Net Receivables, $210,000. Inventories: Finished Goods, $80,000.
Work In Process: $25,200. Raw Materials: $22,800. Pre-paid expenses: $128,000. Total current assets: $536,000″  (Weygandt – 856). This balance sheet, although somewhat partial, is an excellent illustration of the accounting for minor details. They have successfully accounted for every aspect determining their financial profitability through the reporting of “Work in process and Raw Materials. ” This given manufacturing company is reporting the fact that they have invested into raw materials which have not been fully converted into the finished product.
By accounting for these minor details, the company proves that their current assets consist of unfinished goods, demonstrating the incorporation of detailed accounting principles into their micro-economic stability. As a result, the company is insuring an organized model that will prepare them for economic growth come the next fiscal year. The sole purpose of maintaining accounting records is most frequently misunderstood as a means of reporting financial activity solely for tax and liability purposes.
Although it is the most accurate way to describe the business’s financial activity of a given time period, it also achieves the role of organizing the business entity in to a fully functional business model. The following comparative example of a primitive merchandising and manufacturing company demonstrates the function of the template set by accounting principles. “Under a periodic inventory system, the income statements of a merchandiser and manufacturer differ in the cost of goods sold section.
Manufacturers compute cost of goods sold by adding the beginning finished goods inventory to the cost of goods manufactured and subtracting the ending goods inventory. In order to determine the cost of goods manufactured, a handful of variables must be accounted for: Work in process, direct materials available for use, labor expenses, manufacturing overhead”  (Weygandt – 850-854). Suppose a manufacturing company has just been founded, and is not very familiar with how to run an efficient business model.
By following this accounting template for a manufacturer, the rookie company is in full realization of its goals and how it must meet them. They are also aware of what expenses will be incurred during the production process. Assuming their goods being sold are worthy of constant production, by following this periodic system, owners will be able to competently calculate their net income or loss. This consists of the difference between the final selling price and all the minor expenses realized during the production and manufacturing of their products.
The utilization of this inventory system is only one of many ways organized accounting provides a path to financial success for newfound companies. Through the explanation of the development of economic theories, accounting standards were automatically taken into consideration. The collaboration of classical economists’ thoughts lead to a theoretical conclusion of Say’s law, described by Economics Today in the following excerpt: “Every time you produce something for which you receive income, you generate the income necessary to make expenditures on other goods and services.
That means that an economy producing $15 trillion worth of real GDP, measured in base-year dollars, simultaneously produces the income with which these goods and services can be purchased. As an accounting identity, actual aggregate output always equals actual aggregate income. Classical economists took this accounting identity one step further by arguing that total national supply creates its own national demands”
The presence of accounting fundamentals is quite discernable, even in the mindset of economists from over two centuries ago. Although they are present, they have undoubtedly been transformed into more descriptive fundamentals. Furthermore, the following excerpt identifies how some minor principles of accounting correlate with microeconomic theory: “They asserted what has become known as Say’s law: Supply creates its own demands; hence, it follows that desired expenditures will equal actual expenditures. Say’s Law] states that the very process of producing specific goods (supply) is proof that other goods are desired(demand). People produce more goods than they want for their own use only if they seek to trade them for other goods. Someone offers to supply something only because he or she has a demand for something else. The implication of this, according to Say, is that no general glut, or overproduction, is possible in a market economy.
From this reasoning, it seems to follow that full employment of labor and other resources would be the normal state of affairs in such an economy. ”  In full realization of these classical theories, present-day economists have drawn standardized conclusions which now fill the textbooks of modern educational institutions around our nation. It is through the development and adjustment of these principles with which we are able to draw definitive conclusions about financial situations a small business or a whole nation will encounter.
My intention in writing this essay is to raise awareness of an easily achievable corporate supremacy through a business’s accounting and economic balance. As an undergraduate student, I have many friends already focusing their lives on sole Business Economics and Business Accounting majors. By founding an online forum and blog centered on the fundamentals discussed in this essay, my ultimate objective will be to motivate individuals to double-major in both subjects.
Given the fact that this may be a tedious task for some, I would still love to spark the interest of business-oriented individuals seeking the undoubted success of their future businesses. I hope to bring monetary joy to those who choose to embrace my proposal of the combined exploitation of both subjects’ essentials. And as for those who do not agree with my proposal of success through the application of accounting and economic notions, you may indulge in your Biochemistry major.
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