Professional Documents
Culture Documents
BRANCHES OF ACCOUNTING
Content Standard:
Performance Standard
1. Make a list of business within the community on the types of accounting services
they require.
2. Solve exercises in the identification of the branches of accounting described
through the types of services rendered
The learners…
1. Differentiate the branches of accounting
2. Explain the kind/type of services rendered in each of these branches
DISCUSSION PROPER
Introduction:
Multiple types of accounting careers exist within the financial industry, with each
performing a differing range of functions. Branches of accounting vary based on the
employment setting, range of responsibilities and daily activities, types of available
advancement, and other factors. Though different professional accounting sources may
divide accounting careers into different branches. This branches are discussed in this
chapter to reflect the accounting roles commonly available throughout the profession.
There are eight branches of accounting:
1. Financial accounting
2. Management accounting
3. Government accounting
4. Auditing
5. Tax accounting
6. Cost accounting
7. Accounting education
8. Accounting research
LESSON 1: Branches of Accounting
1. Financial Accounting
Financial accounting is the science and art of recording and classifying financial
transactions in the books, summarizing and communicating financial information
through production of financial statements or reports in accordance with Generally
Accepted Accounting Principles (G.A.A.P), and interpretation of the operating results
portrayed in financial statements or reports to facilitate decision making. It is the
commonest type of accounting and is practiced by almost all the organizations, whether
profit-making or not ranging from schools, businesses, churches, trading organization,
service organization, etc.
These reports are prepared by applying the Australian Accounting Standards and will
generally follow a specified format although there still remains some ability to vary this.
These reports are prepared by entities as determined under the Corporations Act and
the application of the Statement of Accounting Concepts. As a general guide any
company that has a large number of employees, foreign ownership or a perceived high
number of end users that are reliant on the financial accounts to make decisions
regarding the application of their resources, will prepare general purpose financial
reports.
2. Management Accounting
Its goal is to advise the management on the most appropriate course of action
based on the cost efficiency and capability.
a) while shareholders, creditors, and public regulators use publicly reported financial
accountancy information, only managers within the organization use the normally
confidential management accounting information;
3. Cost Accounting
Unlike the accounting systems that help in the preparation of financial reports
periodically, the cost accounting systems and reports are not subject to rules and
standards like the Generally Accepted Accounting Principles. As a result, there is wide
variety in the cost accounting systems of the different companies and sometimes even
in different parts of the same company or organization.
4. Tax accounting
5. Auditing
This the examination of the financial statements, books of accounts and financial
documents of an organization in order to establish whether they show a true and fair
view of the state of that organization. Auditing is in two dimensions i.e. External
Auditing and Internal Auditing.
Internal Auditing – It is the daily routine examination of the financial statements, books
of accounts and financial documents of an organization in order to ensure that there is
not fraud and error. It is done by an employee within the organization (Internal Auditor)
hired by management. This individual’s role is to ensure that the internal control
systems put in place are operating well and there is no fraud, theft, and embezzlement.
An Internal Auditor need not necessarily be a CPA. Internal auditors are usually
employed by a single company. However, unlike private accountants, internal auditors
serve as checks and investigators to prevent mismanagement and fraud. They verify the
accuracy of company records and the efficiency of company operations. They also
evaluate the compliance of company procedures with corporate policies and
government regulations. Internal auditors may also serve in specialty areas, such as
information technology and compliance.
6. Government Accounting
Government and an entity that collects, manages and spends money, needs
accounts to ensure that all funds received and spent are accounted for. Government
accountants are employed by both local governments as well as the central
government. Government accountants maintain the records of the government
agencies for which they work. Government Accounting emphasizes budget discipline by
spending according the amounts budgets and allocated (voted).
In accounting education, we learn what way of recording our different transactions is.
With this education, we can calculate our business's result relating to
different transactions and events. It is not easy to find to reward or return on
investment made by businessman.
8. Accounting research plays an essential part in creating new knowledge. The hard
sciences have produced models of research and testing that can be used and applied
over many disciplines including accounting research. Using these models along with
evidence such as financial statements, stock prices, surveys, experiments, computer
simulations, and mathematical proofs, we can gain a scientific perspective and basis for
the following:
a. Deciding and implementing new accounting or auditing standards
b. Presenting unusual economic transactions in the financial statements
c. Learning how new tax laws impact clients and employers
d. Discerning how the accounting profession affects the capital markets through
academic accounting research
LESSON 2: Distinction between Financial Accounting and Management Accounting
Financial accounting is primarily concerned with the preparation of financial
statements whereas management accounting covers areas such as interpretation of
financial statements, cost accounting, etc. It deals with the preparation of financial
statements to provide information to various interested groups like creditors, banks,
shareholders, financial institutions, government, consumers, etc.
Financial statements, i.e. the income statement and the balance sheet indicate
the way in which the activities of the business have been conducted during a given
period of time.
Financial accounting is charged with the primary responsibility of external
reporting. The users of information generated by financial accounting, like bankers,
financial institutions, regulatory authorities, government, investors, etc. want the
accounting information to be consistent so as to facilitate comparison. Therefore,
financial accounting is based on certain concepts and conventions which include
separate business entity, going concern concept, money measurement concept, cost
concept, dual aspect concept, accounting period concept, matching concept,
realization concept and conventions of conservatism, disclosure, consistency, etc. All
such concepts and conventions would be dealt with detail in subsequent lessons.
The information provided by financial accounting is historical in nature .It is the
basic foundation on which other branches and tools of accounting analysis are based. It
is the source of information, which can be further analyzed and interpreted according to
the requirements of decision-makers.
Management accounting facilitates the management by providing
accounting information in such a way so that it is conducive for policy making and
running the day-to-day operations of the business. Its basic purpose is to
communicate the facts according to the specific needs of decision-makers by
presenting the information in a systematic and meaningful manner. Management
accounting, therefore, specifically helps in planning and control. It helps in setting
standards and in case of variances between planned and actual performances, it helps
in deciding the corrective action. An important characteristic of management
accounting is that it is forward looking. Its basic focus is one future activity to be
performed and not what has already happened in the past. Since management
accounting caters to the specific decision needs, it does not rest upon any well-
defined and set principles. The reports generated by a management accountant can be
of any duration– short or long, depending on purpose. Further, the reports can be
prepared for the organization as a whole as well as its segments.
TABLE 1: FINANCIAL ACCOUNTING VS MANAGEMENT ACCOUNTING
Lesson 3: Role of Management Accountants
The Chartered Institute of Management Accountants (CIMA) defines the role of
chartered management accountants as follows:
Advise manager about the financial implication of projects.
Explain the financial consequences of business decisions.
Formulates business strategies.
Monitors spending and financial control.
Conducts internal audit.
Explains the impact of competitive landscape.
Bring a high level of professionalism and integrity to the business.
Management accounting skills refer to the ability of an individual to provide all required
information for improving decision-making processes in the form of documents and
reports. Management accounting skills enable managers to assess progress by
evaluating the success or failure of the efforts of a business in achieving its goals.
Unlike financial accounting skills, management accounting skills are required merely for
internal use and are focused on improving business processes, for instance, by of
regulating the performance of a particular project, process, or department etc. The
reports and documents generated through utilization of these skills are never issued to
any external parties and help in identifying the changes that are required to be made in
the company.
Management accounting skills are commonly appreciated for their help in the future
planning of a business. The detailed reports produced as a result not only help managers
in setting objectives and planning for their achievement but also enables them to have a
better sense of control over the progress and success of an organization.
However, very few people understand the important role that management accounting
skills can play in the innumerable business decisions made on a daily basis. Whether you
are required to assess the need for an additional product line, consider the
discontinuation of operations, and determine the optimum advertising efforts
depending upon the profitability of customers, or conduct a make or buy analysis,
management accounting skills are the ultimate source of sufficient data-driven input to
all such critical decisions.
CHAPTER SUMMARY
Accounting can be understood as the language of financial decisions. It is an
ongoing process of performance measurement and reporting the results to decision-
makers. The discipline of accounting can be traced back to very early times of human
civilization. With the advancement of industry, modern day accounting has become
formalized and structured. A person who maintains accounts is known as the
accountant. He is engaged in multifarious activities like preparing financial statements,
facilitating the control process, tax planning, and auditing and information
management. The information generated by accountant is used by various groups
like, individuals, managers, investors, creditors, government, regulatory agencies,
taxation authorities, employees, trade unions, consumers and general public.
Depending upon purpose and method, accounting can be of broadly two types–
financial accounting and management accounting.
Financial accounting is primarily concerned with the preparation of financial
statements mainly for outsiders
Management accounting is meant to help in decision-making by analyzing and
interpreting the information generated by financial accounting.
Cost accounting is an important aspect of management accounting. It
emphasizes on cost determination, aiding the planning and control process and
supplying information for short- and long-run decisions.
Accounting research plays an essential part in creating new knowledge. The hard
sciences have produced models of research and testing that can be used and applied
over many disciplines including accounting research.