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Branches of Accounting
The evolving needs of businesses over time have led to the development of various specialized branches of accounting, including:
Financial Accounting : Financial accounting involves recording, summarizing, interpreting, and communicating transactions of a financial nature. It determines profit or loss over a specific period (usually one year) and assesses the financial position at the end of that period. This branch provides essential financial information to management and other stakeholders.
Cost Accounting: Cost accounting focuses on analyzing expenditure to ascertain the cost of products manufactured by a firm and to set prices. It helps in controlling costs and provides necessary costing information for management decision-making.
Management Accounting: Management accounting generates information related to funds, costs, and profits to aid management in decision-making. It is designed to help management make rational policy decisions, evaluate the impact of those decisions, and assess departmental performance.
Tax Accounting: Tax accounting has developed in response to complex tax laws, such as those relating to income tax and sales tax. Professionals in this branch must be knowledgeable about various tax legislations to ensure compliance and optimize tax strategies.
Social Accounting: Also known as social reporting or social responsibility accounting, social accounting discloses the social benefits and costs created by an enterprise. Social benefits might include medical, housing, and educational facilities, while social costs could involve employee exploitation, environmental pollution, and other social issues.
Objectives of Financial Accounting
The main objectives of financial accounting are:
Finding out Various Balances: Systematic recording of business transactions provides information about various balances such as cash and bank balances.
Providing Knowledge of Transactions: Maintaining books systematically offers detailed records of every transaction.
Ascertaining Net Profit or Loss: Summarizing transactions in a Profit and Loss Account reveals the business income over a specific period.
Depicting Financial Position: Preparing a balance sheet shows the financial position of a business, indicating assets and liabilities.
Information to All Interested Users: After analysis and interpretation, business performance and position are communicated to interested users.
Fulfilling Legal Obligations: Vital accounting information helps in fulfilling legal obligations, such as sales tax and income tax requirements.
Functions of Accounting
Accounting provides quantitative information, primarily financial in nature, about economic entities, which is useful for making economic decisions. The major functions include:
Maintaining Systematic Records: Business transactions are properly recorded, classified under appropriate accounts, and summarized into financial statements.
Communicating Financial Results: It communicates financial information regarding net profits (or losses), assets, liabilities, etc., to interested parties.
Meeting Legal Requirements: Compliance with various laws requires the submission of statements like annual accounts and tax returns.
Fixing Responsibility: It helps compute the profits of different departments, facilitating the fixing of responsibility on departmental heads.
Decision Making: It provides relevant data for making decisions related to investments, credit supply, lending, etc.
Advantages of Accounting
Financial Information about Business: Provides details about financial performance and position at the end of the accounting period.
Assistance to Management: Helps management in business planning, decision-making, and control.
Replace Memory: Systematic and timely recording of transactions eliminates the need to remember them.
Facilitates Comparative Study: Enables comparison of results across years to identify significant changes.
Facilitates Settlement of Tax Liabilities: Helps settle tax liabilities by providing evidence of transaction correctness.
Facilitates Loans: Banks and financial institutions use accounting information to assess growth potential and performance for loan approval.
Evidence in Court: Systematic records of transactions are often accepted as evidence in legal proceedings.
Facilitates Sale of Business: Accounting records help determine the proper purchase price when selling a business.
Assistance in Insolvency: Provides necessary transaction records for insolvency proceedings.
Helpful in Partnership Accounts: Vital for settling accounts during partner admission, retirement, death, or firm dissolution.
Limitations of Accounting
Monetary Expression Only: Non-monetary events or transactions are not recorded.
Fixed Assets at Original Cost: Assets are recorded at their original cost, not reflecting current market values, which may misrepresent the financial position.
Estimates and Assumptions: Accounting often relies on estimates, which can be inaccurate, such as asset depreciation.
Managerial Performance: Accounting information alone cannot assess managerial performance, as profits can be manipulated through various means.
Lack of Neutrality: Accounting information may not be unbiased, as it selectively includes certain revenues and expenses while excluding social costs like pollution. Different valuation methods can also affect neutrality
After learning about the objectives and branches of accounting, it's important to understand how accounting serves as a source of information and how various users depend on it.
Please read our next article on Accounting as a Source of Information and Its Users.