Branches or types of accounting

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Introduction

The present age is the age of competition and it is noted that there is a struggle for existence in every field and more particularly in the field of business (which comprises trade, commerce, industry and direct services). It is necessary for every business concern to carry on its activities with utmost efficiency so as to ensure the optimum utilisation of the limited resources lying at its disposal.

Accounting plays an important role in the efficient and successful running of any business. Actually speaking, the planned development of any business concern is possible only if we collect and analyse the financial data in a systematic manner. It is possible only if a good system of accounting has been in use.

Branches or Types of Accounting

Accounting has the following major branches or types:

  1. Financial accounting
  2. Cost accounting
  3. Management accounting

Financial accounting


Financial accounting (also known as general accounting) is considered the original form of accounting. It provides a record of business transactions in financial terms and also the periodical preparation of financial statements from these records.

Financial Accounting is the art or process of recording, classifying and summarising the transactions of financial nature in a systematic manner and interpreting the results thereof. Financial accounting is the traditional form of accounting which is mainly concerned with the recording of day-to-day transactions of the business in the proper books of account with the object of enabling the preparation of Profit and Loss Account and Balance Sheet. Profit and Loss Account discloses the net profit or the net loss of the business for some specified period while the Balance Sheet shows the financial position of the business at a certain date.

This type of accounting provides information to owners, management, government, creditors, bank and other financial institutions. The main purpose of financial accounting is to ascertain profit and loss made by the business during a particular period and show the financial position of the business entity as on a particular date.

In other words:

Financial accounting helps in determining the true financial results of a business. It provides helpful information to various users of the business who even don’t play an active part in the business.

Cost accounting

Cost Accounting is the art or process of recording, analysing and classifying of expenditure for the purpose of product costing or service costing, ascertainment of profitability, operational planning and cost control. Cost accounting is a forward-looking approach which is related to the recording, analysing and classifying of expenditure with the object of ascertaining the total and per unit cost of a product or service.

Cost accounting is an internal aspect of the organisation which measures the operational efficiency of an enterprise and assists the management to maintain costs at the lowest point consistent with the efficient operating conditions. Standard costing, budgetary control and marginal costing are some of the dynamic techniques of cost accounting which are widely used now-a-days.

Cost accounting emphasizes the determination of cost of production and distribution. It helps management in the control of cost. An efficient costing system is an important factor for industrial control.

Cost accounting is used to calculate the cost of a unit purchased. It also helps in measuring & controlling costs to increase profits. The data of cost accounting is generated through managerial accounting.

Management accounting

Management accounting (also termed as managerial accounting) is based upon the concept of accounting as a tool by which managerial effectiveness is enhanced. It provides necessary information to the management for discharging its functions. It seeks to make managerial control more effective by encouraging efficient planning. It provides built-in checks and balances and continuous review to prevent errors and frauds. It helps management to correct mistakes and improve methods.

Management Accounting is the presentation of accounting information in such a way as to assist the management in the creation of policy and in the day-to-day operations of an undertaking. Management accounting relates to the use of financial and cost data for the purposes of evaluating the performance of the business as a whole and the various departments comprising it in relation to pre-determined targets. It also assists in reviewing existing policies or making decisions about new policies and in forward planning.

Management accounting is basically related to providing useful information for decision making for management in dealing with various issues.

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