Principles of Accounting – Accounting’s Relationship to Economics

We sometimes define Economics as the science of wealth, meaning thereby that body of classified knowledge relating to wealth in the aggregate.

Under our present-day political and social systems, the ownership of wealth is very largely private. Furthermore, the division of labor as industry is now organized has been carried to an extreme point. Because of these facts, the present varied organizations for producing wealth to meet human needs and desires have given rise to an urgent need for some effective means of keeping record of all the activities involved in such human endeavor.

The effort of every individual engaged in industry is to increase wealth. To secure that result, he labors to extract the raw materials from nature, to shape and pattern them in such fashion as to supply the wants of his fellowmen, and then to distribute them by means of markets and exchanges so as to secure for himself the greatest possible returns for his effort. As competition along the various lines of human activities has become keener, the margin of this return per unit of product has lessened, and the producer has had to increase his volume of business to secure his customary gains. To become a producer it has been necessary for him to use the saved wealth of former periods to pay his expenses for materials, labor, management, etc., during the period of production. He must consume wealth in order to produce wealth. After his product has been finished he must seek the best market for its exchange. This necessitates the use of a complex system of transportation facilities. Finally, during the whole process of production and exchange there has been constantly before him the distribution of the estimated returns from his effort among the several parties engaged in the production of his article. And more and more as it has been necessary to make this distribution on the basis of estimated returns, has the need, the absolute necessity, for an accurate record of the costs of the activities and processes all along the line become apparent to him. The record, then, of the value of the rights of the various parties to this product, is the special field of work assigned to accountancy.

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