LESSON 2: BRANCHES OF ACCOUNTING

Learning Objectives

At the end of this lesson, the learners should be able to:

1. Explain the accounting profession

2. Differentiate the branches of accounting.
3. Explain the kinds/types of services rendered in each of these branches.
4. Explain the kind/types of services rendered in each of these branches.

The Accountancy Profession

Republic Act No. 9298 is the law regulating the practice of accountancy in the
Philippines. This law is known as the “Philippine Accountancy Act of 2004”.

Accountancy has developed as a profession attaining a status equivalent to that of law

and medicine.

In the Philippines, in order to qualify to practice the accountancy profession, a person

must finish a degree in Bachelor of Science in Accountancy and pass a very difficult
government examination given by the Board of Accountancy.

The Board of Accountancy is the body authorized by law to promulgate rules and
regulations affecting the practice of the accountancy profession in the Philippines.

Branches of Accounting

The work that accountants undertake ranges far beyond that of simply summarizing
information in order to calculate how much profit a business has made, how much it
owes, and how much is owed to it. Although this work is still very important,
accountants are involved in other types of work. Of course, other information
specialists have also been drawn into the preparation of management information, and
at one time, some observers expected accounting to be taken over by these newer and
mores scientifically – based disciplines. However, this has not happened. There are
three main reasons:

1. Financial information supplied to external users still has a dominant influence

on internal management information;
2. Other information specialist have been reluctant to become involved in detailed
accounting matters; and
3. Accountants have been quick to absorb new methods and techniques into their
work.

Public Accounting

In public accounting, the accountant performs or offers to perform any activity that
will result to the issuance of an attest report that is accordance with professional
standards. Such activities include consulting services, personal planning services, the
preparation of tax returns, and advice on tax matters for a fee. Usually a public
accountant works in a firm offering its services to various clients.

External Auditing

External auditing refers to the examination of financial statements by an independent

CPA (Certified Public Accountant) with the purpose of expressing an opinion as to
fairness of presentation and compliance with the generally accepted accounting
principles (GAAP). The audit does not cover 100% of the accounting records but the
CPA reviews a selected sample of these records and issues an audit report.

Tax Accounting

Tax accounting helps clients follow rules set by tax authorities. It includes tax
planning and preparation of tax returns. It also involves determination of income tax
and other taxes, tax advisory services such as ways to minimize taxes legally,
evaluation of the consequences of tax decisions, and other tax-related matters.

Management (or Managerial) Accounting

Management accounting emphasizes the preparation and analysis of accounting

information within the organization. The objective of managerial accounting is to
provide timely and relevant information for those internal users of accounting
information, such as the managers and employees in their decision-making needs.
Oftentimes, these are sensitive information and are not distributed to those outside
the business - for example prices, plan to open up branches, customer list, etc.
Managerial accounting involves financial analysis, budgeting and forecasting, cost
analysis, evaluation of business decisions, and similar areas.

Bookkeeping

Bookkeeping is mechanical task involving the collection of basic financial data. The
data are first entered in the accounting records or the books of accounts, and then
extracted, classified and summarized in the form of income statement, balance sheet
and cash flows statement. This process normally takes place once a month. An income
statement shows whether the business has made a profit or loss during the period, i.e.
it measures how well the business has done. A balance sheet lists what the entity
owns (its assets) and what it owes (its liabilities) as at the end of the period. The cash
flows statement presents the cash inflows and outflows of the business during the
period.

Private Accounting

Private accounting involves in setting up systems of recording business transactions

that are aggregated into financial statements. It includes the development and
interpretation of accounting information intended to assist management in operating
the business.

A private accountant is a salaried employee who deals with the company’s day-to-day
accounting needs. He/she is trained in the processing of accounting transactions such
as billings and account payables. His or her knowledge may be limited to the areas of
accounting for which they are responsible.
Financial Accounting

Financial accounting is the broadest branch and is focused on the needs of external
users. Financial accounting is primarily concerned with the recognition, measurement
and communication of economic activities. This information is communicated in a
complete set of financial statements. It is assumed under this branch that the users
have one common information need. Financial accounting conforms with accounting
standards developed by standard-setting bodies. In the Philippines, there is a Council
created to set these standards.

Examples of these financial reports include:

• the balance sheet (statement of financial condition)

• income statement (the profit and loss statement, or P&L)
• statement of cash flows

Financial accounting is primarily concerned with processing historical data. Although

financial accounting generally meets the needs of external users, internal users of
accounting information also use this information for their decision-making needs

Cost Accounting

Sometimes considered as a subset of management accounting, cost accounting refers

to the recording, presentation, and analysis of manufacturing costs. Cost accounting
is very useful in manufacturing businesses since they have the most complicated
costing process.

Cost accountants also analyze actual and standard costs to help managers determine
future courses of action regarding the company's operations.

Cost accounting will also help the owner set the selling price of his products. For
example, if the cost accounting records show that the total cost to produce one can of
sardines is P50, then the owner can set the selling price at P60.

Financial Management

Financial management is relatively new branch of accounting that has grown rapidly
over the last 30 years. Financial managers are responsible for setting financial
objectives, making plans based on those objectives, obtaining the finance needed to
achieve the plans, and generally safeguarding all the financial resources of the entity.
Financial managers are much more heavily involved in the management of the entity
than is generally the case with either financial or management accountants. It should
also be note that the financial manager draws on much wider range of disciplines and
relies more extensively on non-financial data than does the more traditional
accountant.

Accounting Information System

Accounting information system collects and processes transaction data. It also

disseminates. This is similar to the tax services done in public accounting. In this
branch, however, the client is the business and not the public.
Tax Accounting

Tax accounting helps clients follow rules set by tax authorities. It includes tax
planning and preparation of tax returns. It also involves determination of income tax
and other taxes, tax advisory services such as ways to minimize taxes legally,
evaluation of the consequences of tax decisions, and other tax-related matters.

Internal Auditing

Internal auditing deals with determining the operational efficiency of the company
regarding the protection of the company’s assets, accuracy and reliability of the
accounting data, and adherence to certain management policies. It focuses on
evaluating the adequacy of a company's internal control structure by testing
segregation of duties, policies and procedures, degrees of authorization, and other
controls implemented by management.

Government Accounting

Government accounting is the process of recording, analyzing, classifying,

summarizing, communicating and interpreting financial information about the
government in aggregate and in detail reflecting transactions and other economic
events involving the receipt, spending, transfer, usability and disposition of assets and
liabilities. This branch of accounting deals with how the funds of the government are
recorded and reported. Government accounting deals with these transactions, the
recording of inflow and outflow of funds of the government.

Accounting Education

Accounting education deals with developing future accountants by creating relevant

accounting curriculum. Accounting professionals can become faculty members of
educational institutions. Accounting educators contribute to the development of the
profession through their effective teaching, publications of their research and
influencing students to pursue careers in accounting. Accounting teachers share their
knowledge on accounting so that students are informed of the importance of
accounting and its use in our daily lives.

Accounting Research

Accounting research focuses on the search for new knowledge on the effects of
economic events on the process of summarizing, analyzing, verifying, and reporting
standardized financial information, and on the effects of reported information on
economic events. Researchers typically choose a subject area and a methodology on
which to focus their efforts. The subject matter of accounting research may include
information systems, auditing and assurance, corporate governance, financials,
managerial, and tax. Accounting research plays an essential part in creating new
knowledge. Academic accounting research "addresses all aspects of the accounting
profession" using a scientific method. Practicing accountants also conduct accounting
research that focuses on solving problems for a client or group of clients. The
Accounting research helps standard-setting bodies around the world to develop new
standards that will address recent issues or trend in global business.
CPAs in Specialized Areas

Forensic Accounting

Forensic accountants provide the defective work needed to investigate and examine
evidence of white-collar financial crimes such as stealing and fraud. They often act as
expert witnesses in legal proceedings and prepare evidence to be presented in court.

Information Technology Services

Businesses often seek individuals who can design and implement customized software
systems. CPAs who possess strong skills in information technology can work with e-
commerce ventures and consult with others to determine which decisions are the most
financially and technologically sound for a company.

Environmental Accounting

CPAs involved in environmental accounting determine how companies can be both

profitable and environmentally-responsible. They do environmental compliance audits
and set up preventative systems to ensure compliance and avoid future
environmental-related claims or disputes.

International Accounting

International accountants are knowledgeable in international trade rules and

regulations, international mergers, government regulations, tax laws and overseas
transactions. CPAs who work in this area often travel abroad and can speak and
understand different languages.