The use of computers and electronic records in the accounting world has led to increased efficiency in the accounting process. Inefficiency accounting is not necessarily a judgment of certain accounting methods as being less efficient than others, but instead refers to using accounting methods that do not use the insights provided by efficiency accounting.
Efficiency in accounting generally refers to the use of certain ratios and measurements designed to assess the effectiveness of a specific company or firm. Efficiency ratios are used to assess the financial condition of a company based on the way it manages its assets. It also refers to the manner in which a company deals with its liabilities. The primary idea in efficiency accounting is that business efficiency can be improved based on what these mathematical ratios indicate. Paying attention to the ratios should increase cash flow and profits while decreasing liabilities.
Several ratios are used in the efficient accounting method. For instance, fixed asset turnover ratios are used to measure the comparison between a company's net sales and fixed assets. Asset and stock turnover ratios are also used in the same manner. Ratios related to debt and collections are also used. For example, the number of days before a debtor pays the company is often measured as the number of days it takes before the company itself pays its creditors.
Inefficiency accounting is not really inefficient, but rather the way that companies traditionally account for business activity. This type of accounting refers to the way in which companies record their financial transactions, but it has little or nothing to do with financial ratios or measurement in most cases. Instead, inefficiency accounting refers primarily to the recording and auditing of information. Inefficiency accounting is sometimes referred to as effective accounting to set it apart from efficiency accounting.
The accounting profession is divided as to which method of accounting is better. One of the primary criticisms of efficiency accounting is that while it allows for measurement of financial information, it also requires some sort of judgment. Ratios provide information that must be interpreted. In effective or inefficient accounting, the numbers are recorded and used as needed, but not necessarily for the sake of improving business efficiency or results. Oftentimes, inefficiency accounting is used for tax purposes.
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