The Micro and Macro Economics of Accounting
Career Path : Accounting
The economic spectrum is often seen as being divided into two distinct realms: microeconomics and macroeconomics. In the simplest of terms, microeconomics deals with the economics of individual or localized businesses or even households, and are based on the idea that the resources required for these are inherently bound by the principle of scarcity. Macroeconomics, on the other hand, is concerned with entire industries and markets as a whole, or even the economics of nationsÂ or the world, related toÂ populations, resources, inflation and gross domestic product.
Accounting is essentially a practice: a system of analyses and implementation of the bottom-line numbers of a company’s (or nation’s) financial performance. But practice alone without a supporting theoretical background is often at risk of shortcomings; that is, failing to understand the bigger picture of profit and loss, success and failure. Because of this, accounting makes use of both microeconomic and macroeconomic theory in its practice.
Microeconomics and Managerial Accounting
Human beings can sometimes have unlimited wants and demands, but in the small-scale world of microeconomics (households, businesses), the resources to satisfy these wants and needs are limited. This is known as economic scarcity The managerial accountant works to balance the budget and analyze the results of individual businesses that are themselves bound by the microeconomic theory of scarcity. Another important distinction that the accountant must be aware is the dual definition of ‘profit.’ Proper accounting training demonstrates that while a company can be well-off at an accounting level (revenue minus expenses), they can actually be at a loss at an economic level (including other factors such as opportunity costs and legal issues). Using these theories is solid managerial accounting practice.
Macroeconomics and Financial Accounting
Macroeconomics is not limited to specific markets, and consequently not limited to individual businesses competing for resources and market-share within the same market. The concept of scarcity is therefore less important at the macro level. Unlike the managerial accountant, a financial accountant’s responsibilities is keeping track and analyzing the financial situation of entire industries, nations, and world currenciesâin other words, the big picture. No economic model can be considered safe and accurate to work with if it does not take into consideration the actualities of accounting practices and past results. Likewise, because of the large-scale responsibilities of the financial accountant, his or her practices must be informed by the macroeconomic theories of production or output, employment and unemployment, and inflation, among others. Accounting programs often require classes in macroeconomics to understand the relation between these phenomena.
Economic theory in-itself is a dead end without practice, while practice can be irresponsible and potentially economically dangerous without applying the right theory. This is why any accountant, whether managerial or financial, needs to be have some training in micro and macroeconomics.
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