Q. What is Social Accounting? How is the classification of economic activities done?

Q. What is Social Accounting? How is the classification of economic activities done?

Answer-

Social accounting has assumed great importance in modern times. Understanding of the working of the economy is essential for solving practical problems through application of theoretical knowledge. In the absence of a clear picture of the working of the economy, an economist is seriously handicapped in giving policy suggestions to the government or giving practical advices to businessmen. To understand the complex economic relationship a clear understanding and grasp of the social accounting is essential. Since the publication of the Keynes’ General Theory national income accounting has become an official job, statistics of national income reflects changes in the economic health of the country and the fluctuations in the economic activities. As a result, many new concepts have come to be associated with the study of national income and social accounts. Accounts maintained by private individuals are called ‘Private Accounting’ whereas the accounts of the entire economy are called ‘Social Accounting’.

The term social accounting is used for that part of descriptive economics which relates to production and distribution of national income. As has been mentioned earlier, social accounting helps in understanding the complex economic relationships. But what precisely is social accounting?

Social accounting is a wider concept and embraces national income accounting. As such it is concerned with the classification of the activities of human beings and institutions in ways that help us to understand the operation and working of the economy as a whole. In social accounts, all types of transactions are properly recorded and represented in a purposeful way.

Social accounting in management discipline also means the preparation and publication of an account about an organization’s social, environmental, employee, community, customer and other stakeholder interactions and activities, and where possible, the consequence of those interactions and activities.

Social accounting is the process of communicating the social and environmental effects of organisations’ economic actions to particular interest groups within society and to society at large. As such, it involves extending the accountability of organisations (particularly corporations) beyond the traditional role of providing a financial account of capital, in particular, to shareholders. Such an extension is predicated upon the assumption that companies do have wider responsibilities beyond simply making money for their shareholders.

Social accounting is that aspect of accountancy which, while indistinguishable from financial and management accounting, deals more specifically with environmental concerns; that is, it is an aspect of the information system that enables data collection and analysis, performance follow-up, decision-making and accountability for the management of environmental costs and risks. (Gauthier et al. 1997, p. 1)

But in macroeconomics social accounting is known as national income accounting. The term ‘social accounting’ was first introduced into economics by J.R. Hicks in 1942. In his words, it means ‘nothing else but the accounting of the whole community or nation, just as private accounting is the accounting of the individual firm’.

Thus, ‘social accounting’ embraces, however, not only the classification of economic activity, but also the application of the information thus assembled to the investigation of the operation of the economic system.” In other words, social accounting describes statistically the economic activities of the different sectors of the entire economy, which indicates their mutual relationships and provides a framework for analysis.

Growth of Social Accounting System:

The development of Social Accounting system was first of all favoured by USA in 1915and a pioneering work was undertaken by the National Bureau of Economic Research in 1920 relating to the purpose meaning and measurement of national income. The study of national income accounting got momentum during Great Depression especially after the publication of Keynes’ General Theory in 1936. During and after World War II Richard Stone did remarkable work in the growth of social accounting system.

The following major classification is made for the compilation of social accounting or national income accounting. For the social accounting the first step is to classify the millions of transactions conducted by the people of the country into productive and non-productive activities.

(i)                 Productive activities are those activities which contribute to the flow of goods and services in an economy and are performed to earn a livelihood in exchange for money.

(ii)               Non-productive activities on the other hand are not performed for the sake of earning money. In non-productive activities there is only money flow without corresponding real flow. These are only one sided transactions.

(iii)             Transfer payments of the government come under this category.

While preparing the Social or National Income accounting only productive activities are taken into account; non-productive activities are excluded from Social Accounting or National Income accounting.

Classification of Economic Activities:

The classification of all the economic activities is done into these sectors:

(i)                 Production: These are the statistical statement of the output of different sectors. The major statements based on this sector are GNP, NNP, NI, PI, and DI. These accounts reveal the current productive capacity of the economy

(ii)               Flow-of-Funds Account: This system is a link between financial and non-financial sectors. These funds cover money and credit transactions. In flow-of-funds account, the economy is divided into four sectors and each sector provides specific information of the concerned sector.

(iii)             Input-Output Tables: The input-output tables record inter-industry transactions. It is systematic method of analysing the relationship between various industries and production in the economy as a whole. In this system, the economy is sectored into industries and records are kept for each industry about output of each industry bought from and sold to other industries.

(iv)              Balance of Payments Tables: These tables reveal foreign trade statistics of a country.

(v)                National Balance Sheet: It shows the assets and liabilities of the different sectors of the economy.

Richard Stone developed a system of social accounting in which all the transactions are classified into broad sectors like: production; consumption; government; foreign; and final sector. The system is based on Keynesian system of accounting. Besides the functional classification into personal sector, business sector, government sector and the rest of the world sector also done in preparation of social accounting or National Income accounting. The double entry accounting for these sectors is used. All transactions are recorded following the simple rules of double entry accounting system. In order to prepare a consolidated account, the sectoral accounts are brought together.

 The sectoral breakdown in Social accounting is useful for the following reasons:

1.      It gives all require information about every sector in the economy.

2.      It helps to appreciate relative importance of various sectors in the economy.

3.      It shows the income distribution in a country.

4.      It shows the impact of government expenditure on various sectors.

5.      It helps the administrators, planners, and government to formulate and design appropriate policy for a sector.

***