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January 20, 20167 min read The very objective of accounting is to provide accurate, reliable and timely financial information to the various stakeholders of the business.The intent is to enable the users of accounting information to interpret the results of business operations, ascertain its financial position, solvency and undertake rational decision making.Before going any further, it is essential to know who these entities are and why do they need accounting information of the business? Users of of AccountingThe financial information of the company is required by its various stakeholders which include:
Internal UsersOwners use financial statements to understand the overall performance of their business. They are keen on ascertaining the profitability, the amount of risk involved and understanding the impact of the changing economic factors on their business. Likewise, managers need accounting information to strategize, control and take informed decisions for their respective divisions . They need to project sales and expenses to come with projections for the future periods and thus ensure that the available resources are allocated appropriately via budgeting. External UsersSimilarly, creditors and lenders are keen on understanding the credibility and financial soundness of the company they are lending to. They are interested to know if the company would be able to pay back the credit by evaluating its liquidity and overall profitability. On the other hand, investors require financial information to evaluate their decision of investing in the business. Thus, considering the variety of purposes for which accounting information is needed by various entities, there exist different branches of accounting. This article talks in detail about the various branches or types of accounting and their significance. Branches of Accounting1. Financial AccountingFinancial accounting is a branch of accounting that deals with the process of recording, summarizing and reporting of the entity’s financial transactions. The objective is to record, prepare and present financial information systematically to be able to ascertain the financial results of the entity for a given accounting period. Thus, financial accounting involves the reporting of accurate, reliable and timely information of the entity’s operating profit and financial position to its various stakeholders. Further, these financial reports or statements are prepared as per the standard format and accounting principles specific to the region or country in which the entity is located. The accounting principles that an entity adheres to while preparing its financial statements depends upon the regulatory and reporting requirements of the area/country or the target market it deals with. This is to bring uniformity across the financial statements of entities of the specific region/country and undertake inter company comparisons easily. For instance, companies in India follow Indian Accounting standards. Whereas companies in the US adhere to Generally Accepted Accounting Principles (GAAP). Financial Statements Prepared in Financial AccountingAs mentioned above, financial information is reported to the users of accounting information with the help of financial statements. These majorly include:
Also, these financial statements depict five major facets of the financial information of a business entity. These include:
2. Cost AccountingCost accounting is a branch of accounting that deals with:
It involves the use of various costing techniques, principles and standards that help business entities to develop budget to control costs and be cost effective. Commonly used cost accounting techniques include:
A costing technique where costs are categorized as fixed and variable cost. Furthermore, the cost of producing additional outputs is calculated and the impact of changes in volume or type of such additional output on profit is analysed.
It involves preparing budgets and comparing actual performance with budgetary performance to achieve the targets.
It involves setting standard costs and comparing them with the actual cost. Furthermore, the differences between the standard and actual costs are analysed which involves finding the underlying causes and their impact.
It involves using the same costing principles and methods by a number of businesses under the common management. The idea is to allow for greater comparability between the costs ascertained by various businesses. As mentioned above, the Cost Accounting Standards Board (CASB) have formulated certain cost accounting standards to be adopted by organizations so as to bring uniformity in cost measurement, classification and assignment. Further, cost accounting involves classifying costs associated with the production of goods or services. This is undertaken based on various factors such as nature of expenses, its relation to a cost unit or cost centre, different functions of the business entity, cost behavior etc. Accordingly, these can be classified based on the:
3. Management AccountingManagement accounting came into existence subsequent to financial and cost accounting. As the name suggests, it is a branch of accounting that associates management of an organization with accounting. Thus, any information that is necessary for managerial decision-making forms part of management accounting. This information is ultimately provided to the management by the other two branches – financial and cost accounting. In other words, management accounting gathers financial and cost accounting information and provides the same to people at various levels in managerial hierarchy. This further enables the managers in undertaking managerial functions like planning, controlling, decision making etc and evaluating the performance of each these managerial functions. Thus, management accounting can be defined as the use of relevant techniques and concepts:
Needless to say, management accounting is, therefore, undertaken to:
Furthermore, management accountants use various techniques to undertake management accounting effectively. These include: Financial Statement AnalysisThis is a technique that helps in evaluating the financial data provided by the financial statements of the company. Various tools of financial statements include common size statement analysis, comparative statement analysis, ratio and cash flow analysis etc. Financial PlanningThis involves deciding beforehand the financial engagements necessary for a company to achieve its goals. Therefore, it requires the management to formulate policies in respect of working capital needs, sources of funds, utilization of funds etc. Control TechniquesTools like budgetary control and standard costing are used to confirm that planned performance translates into actual performance. What is the branch of accounting that focuses on the preparation of general purpose financial statements?Financial accounting involves recording and clarifying business transactions along with preparation and presentation of financial statements. Financial accounting follows GAAP principles and focuses on historical data.
What is the branch of accounting?Branch accounting is a bookkeeping system in which separate accounts are kept for each branch or operating location of an organization. Technically, the branch account is a temporary or nominal ledger account, lasting for a designated accounting period.
What does financial accounting focus on?The focus of financial accounting is on summarizing and reporting a business's financial position to entities outside the business with a vested interest, such as stockholders, creditors, government agencies and suppliers.
What branch of accounting that provides information used internally for planning evaluating analyzing and controlling business decisions and operations?Key Takeaways. Managerial accounting involves the presentation of financial information for internal purposes to be used by management in making key business decisions.
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