Branches of Accounting

Different
Accounting
Branches of
Different branches of accounting came into
existence keeping in view various types of
accounting information needed by a different
class of people viz. owners, shareholders,
management, suppliers, creditors, taxation
authorities and various government agencies,
etc. There are three main branches of accounting
which include financial accounting, cost
accounting and management accounting.
1. Financial
Accounting
Financial Accounting is based on a systematic method of recording transactions of any business
according to the accounting principles. It is the original form of the accounting process. The main purpose
of financial accounting is to calculate the profit or loss of a business during a period and to provide an
accurate picture of the financial position of the business as on a particular date. The Trial Balances, Profit &
Loss Accounts and Balance Sheets of a company are based on an application of financial accounting.
These are used by creditors, banks and financial institutions to assess the financial status of the company.
Further, taxation authorities are able to calculate the tax based on these records only.
2. Cost Accounting
Cost accounting deals with evaluating the cost of a product or service offered. It calculates the cost by
considering all factors that contribute to the production of the output, both manufacturing and
administrative factors. The objective of cost accounting is to help the management in fixing the prices and
controlling the cost of production. It also pin points any wastages, leakages and defects during
manufacturing and marketing processes.
3. Management Accounting
This branch of accounting provides information to management for better administration of the business. It
helps in making important decisions and controlling of various activities of the business. The management
is able to take decisions efficiently with the help of various Management Information Systems such as
Budgets, Projected Cash Flow and Fund Flow Statements, Variance Analysis reports, Cost-Volume-Profit
Analysis reports, Break-Even-Point calculation, etc.
Users of
Accounting Information
Accounting information helps users to make better financial decisions. Users of financial information may
be both internal and external to the organization.
1, Internal users (Primary Users) of accounting information include the following:
L Management: for analyzing the organization's performance and position and taking appropriate
measures to improve the company results.
L Employees: for assessing company's profitability and its consequence on their future
remuneration and job security.
L Owners: for analyzing the viability and profitability of their investment and determining any
future course of action.
Accounting information is presented to internal users usually in the form of management accounts,
budgets, forecasts and financial statements.
2. External users (Secondary Users) of accounting information include the following:

L Creditors: for determining the credit worthiness of the organization. Terms of credit are set by
creditors according to the assessment of their customers' financial health. Creditors include
suppliers as well as lenders of finance such as banks.
L Tax Authorities: for determining the credibility of the tax returns filed on behalf of the company.
L Investors: for analyzing the feasibility of investing in the company. Investors want to make sure
they can earn a reasonable return on their investment before they commit any financial resources
to the company.
L Customers: for assessing the financial position of its suppliers which is necessary for them to
maintain a stable source of supply in the long term.
L Regulatory Authorities: for ensuring that the company's disclosure of accounting information is
in accordance with the rules and regulations set in order to protect the interests of the stakeholders
who rely on such information in forming their decisions.
Generally Accepted
(GAAP)
Accounting Principles
Generally Accepted Accounting Principles (GAAP) are a common set of accounting principles, standards
and procedures that companies must follow when they compile their financial statements. GAAP is a
combination of authoritative standards (set by policy boards) and the commonly accepted ways of
recording and reporting accounting information. GAAP improves the clarity of the communication of
financial information.
The origins of GAAP or Generally Accepted Accounting Principles go all the way back to 1929 and the
stock market crash that caused the Great Depression. Faith in the economy was at an all time low and the
government of that time decided that something had to be done to rebuild that faith. Thus, the Securities
and Exchange Commission or SEC was formed with a mission to regulate financial practices. The SEC in
turn asked the American Institute of Accountants for help in order to examine financial statements and
1936 the concept of GAAP was spoken about for the first time.
There are ten basic principles that make up these standards:
1. The Business as a Single Entity Concept:

A business is a separate entity in the eyes of the law. All its activities are treated separately from that of
its owners. In legal terms a business can exist long after the existence of its promoters or owners.
2. The Specific Currency Principle:
A currency is specifiedfor reporting the financial statements. In the United States all the numbers have to
be expressed in US dollars. Companies who conduct parts of their businesses in foreign currencies have to
convert the amounts in US dollars using the prevalent exchange rate while reporting their financial
statements.
3. The Specific Time Period Principle:
Financial statements always pertain to a specific time. Income statements have a start date and an end
date. Balance sheets are reported as on a certain date. This way the readers know during which period the
business transactions were conducted in.
4. The Historical Cost Principle:
Historical costs are used for valuing items. The prices at which items were brought and sold are used for
the valuations. Real values do change during the course of time due to inflation and recession, but these
are not considered for reporting purposes.
5. The Full Disclosure Principle:
The full disclosure principle is always in keen focus what with all the accounting scandals in the news
nowadays. It is required that companies reveal every aspect of the functioning in their financial statements.
6. The Recognition Principle:
There is also the recognitionprinciple which states that companies reveal their income and expenses in
the same time period in which they were accrued.
7. The Non-Death Principle of Businesses:
The accounting principles assume that businesses will continue to function eternally and have no end
date as such.
8. The Matching Principle:
The matching principle states that the accrual system of accounting be used and for every debit there
should be a credit and vice versa.
9. The Principle of Materiality:

Then there are a couple of principles which require the bookkeepers to use their judgment rather than sure
shot rules. There are inaccuracies in all accounting records. After all, nobody is perfect. But when errors are
made how important are they for the book keeper to break his head over. A ten dollar error can be ignored,
but not a thousand dollars one. This is where the principle of materiality comes in and this is where the
accountants have to use their judgments.
10. The Principle of Conservative Accounting:
Conservative accounting is another principle to be adopted for the good of the company. When expenses
happen they are to be recorded immediately, but incomes are to be recorded only when the actual cash has
been received. Of course, what policies companies follow depend on their own internal strategy.
Companies need to know the GAAP rules thoroughly. In these times when the banking sector and indeed
the whole financial world is under so much scrutiny regulators are taking compliance issues, accounting
principles and business practices very seriously. That is why it is essential that every individual in the
organization adhere to these rules and principles. Having an effective Finance and Accounting team is
critical to ensure the accuracy of financial statements.
ALIESSA RAGONOT
GRADE 11 ABM

Branches of Accounting

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What are the three main branches of accounting?

What are the main users of accounting information?

Different

1, Internal users (Primary Users) of accounting information include the following:

2. External users (Secondary Users) of accounting information include the following:

There are ten basic principles that make up these standards:

1. The Business as a Single Entity Concept:

2. The Specific Currency Principle:

3. The Specific Time Period Principle:

4. The Historical Cost Principle:

5. The Full Disclosure Principle:

6. The Recognition Principle:

7. The Non-Death Principle of Businesses:

8. The Matching Principle:

9. The Principle of Materiality:

10. The Principle of Conservative Accounting:

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