RECORDING FINANCIAL TRANSACTIONS 35
(a valuable resource), whereas anopportunity costis the lost opportunity of not
doing something, which may be the loss of time or the loss of a customer, equally
valuable resources. If it is the cash cost, is it thehistorical(past) cost or thefuture
cost with which we should be concerned?
For example, is the cost of an employee:
žthe historical, cash cost of salaries and benefits, training, recruitment etc.
paid? or
žthe future cash cost of salaries and benefits to be paid? or
žthe lost opportunity cost of what we could have done with the money had
we not employed that person, e.g. the benefits that could have resulted from
expenditure of the same money on advertising, computer equipment, external
consulting services etc.?
Wilson and Chua (1988) quoted the economist Jevons, writing in 1871, that past
costs were irrelevant to decisions about the future because they are ‘gone and
lost forever’. This is a difficult question, and the problematic nature of calculating
costs may have been the source of the comment by Clark (1923) that there were
‘different costs for different purposes’.
This, then, is our third limitation of accounting: what do we mean by cost and
how do we calculate it?
Conclusion
This chapter has described how an accounting system captures, records, summa-
rizes and reports financial information using the double-entry system of recording
financial transactions in accounts. It has also identified how the principles underly-
ing the accounting process can present limitations for managers in using financial
information for decision-making. This has a particular effect in relation to cost,
which as we will see throughout Part II is crucial for non-financial managers.
In this chapter we have also identified three particular limitations of accounting
that result from the domination of the scorekeeping function:
žthe exclusion of the wider human, social and environmental costs from those
reported by accounting systems;
žthe focus on line items rather than cost objects, despite the latter having more
meaning for planning, decision-making and control; and
žthe problematic notion of defining cost as historic, future or opportunity.
Each of these is taken up in subsequent chapters.
References............................................
Clark, J. M. (1923).Studies in the Economics of Overhead Costs.Chicago,IL:Universityof
Chicago Press.
Horngren, C. T., Bhimani, A., Foster, G. and Datar, S. M. (1999).Management and Cost
Accounting. London: Prentice Hall Europe.
Wilson, R. M. S. and Chua, W. F. (1988).Managerial Accounting: Method and Meaning.Lon-
don: VNR International.