Branches of Accounting

The branches and areas of accounting, particularly:

• Financial Accounting
• Management Accounting
• Government Accounting
• Auditing
• Tax Accounting
• Cost Accounting
• Accounting Education
• Accounting Research

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.

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 is not distributed to those outside the business
- for example, prices, plans to open up branches, customer list, etc.
Managerial accounting involves financial analysis, budgeting and forecasting, cost analysis, evaluation of business decisions,
and similar areas.

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.

Auditing
There are two types of auditing: external and internal 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.
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.

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.

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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
shows that the total cost to produce one can of sardines is PHP50, then the owner can set the selling price at PHP60.

Accounting Education
This branch of accounting 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.

Users of Accounting Information

There are two broad categories of users of financial information: internal and external users.

INTERNAL USERS
Internal users of accounting information are those individuals inside a company who plan, organize, and run the business.
These users are directly involved in managing and operating the business. These include marketing managers, production
supervisors, finance directors, company officers and owners
Engage the learners in a question-and-answer type lecture.

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

 Management
Information need: income/earnings for the period, sales, available cash, production cost
Decisions supported: analyze the organization's performance and position and take appropriate measures to improve the
company results. sufficiency of cash to pay dividends to stockholders; pricing decisions
 Employees
Information need: profit for the period, salaries paid to employees
Decisions supported: job security, consider staying in the employ of the company or look for other employment
opportunities
 Owners
Information need: profit or income for the period, resources or assets of the business, liabilities of the business
Decisions supported: considerations regarding additional investment, expanding the business, borrowing funds to support
any expansion plans.
Accounting information is presented to internal users usually in the form of management accounts, budgets, forecasts and
financial statements. This information will support whatever decision of the internal users.

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EXTERNAL USERS
External users are individuals and organizations outside a company who want financial information about the company.
These users are not directly involved in managing and operating the business. The two most common types of external
users are potential investors and creditors. Potential Investors use accounting information to make decisions to buy shares
of a company Creditors (such as suppliers and bankers) use accounting information to evaluate the risks of granting credit or
lending money. Also included as external users are government regulatory agencies such as Securities and Exchange
Commission (SEC), Bureau of Internal Revenue (BIR), Department of Labor and Employment (DOLE), Social Security System
(SSS), and Local Government Units (LGUs).

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

 Creditors: for determining the credit worthiness of an 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.
 Tax Authorities (BIR): for determining the credibility of the tax returns filed on behalf of a company.
 Investors: for analyzing the feasibility of investing in a company. Investors want to make sure they can earn a
reasonable return on their investment before they commit any financial resources to a company.
 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.
 Regulatory Authorities (SEC, DOLE): for ensuring that a 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.

Forms of Business Organizations

1. Sole / Single Proprietorship
2. Partnership
3. Corporation
4. Cooperatives

1. Sole/single proprietorship.
• A form of business is owned by one person; the simplest, and the most common form of business organization
• It is not separate from the owner. The business and the owner are inseparable

advantages of sole/single proprietorship.

• The owner keeps all the profits.
• The owner makes all the decisions.
• It is easy to form and operate.
disadvantages of sole/single proprietorship.
• The life of the business is limited to the life of the owner. Once the owner dies, the business will cease to operate under
the name of the proprietor.
• The amount of capital is limited only by the wealth of the proprietor.

2. partnerships
• A form of business owned by two or more persons. The details of the arrangement between the partners are outlined in a
written document called articles of partnership.
• Profits are divided among partners based on their agreed sharing.
• The owner is called a partner.

advantages of a partnership
• Higher capital because two or more persons will contribute to the common fund.
• It is easy to operate like a sole/single proprietorship
disadvantages of a partnership
• The profits are divided among the partners.
• A partner can be held liable for the acts of the other partners.
• In a lawsuit, the personal properties of the partners can be held beyond their contributions and may be used to answer for
any liability of the partnership.

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3. corporations
• A corporation is a business organized as a separate legal entity (artificial person) under the corporation law with
ownership
divided into transferable shares of stocks
• Emphasize that it is the law (Corporation Code of the Philippines) that creates a corporation.
• The corporation begins its existence from the date the Articles of Incorporation is approved by the Securities and Exchange
Commission (SEC).
• The SEC (Securities and Exchange Commission) is the government agency primarily tasked to regulate private corporations
in the Philippines.
• The owners are called stockholders or shareholders.
• The word ‘Corporation/Incorporation/Corp./Inc.’ appears in the name of the entity.
• The voting rights of a shareholder is generally based on the percentage of ownership.
• The management of the business is delegated by the shareholders to the Board of Directors
• The ownership is divided into shares and the value of one share may be denominated at a smaller amount, for example at
PHP10 per share.
• The proof of ownership is evidenced by a stock certificate.

advantages of a corporation
• Can easily raise additional funds by selling shares of stocks to the public.
• Shareholders are not personally liable for the debts of the corporation. The extent of their liability is limited to their equity
(ownership) in the corporation.
Discuss the disadvantages of a corporation
• It is relatively complicated to set up.
• Subject to several legal restrictions as listed in the Corporation Code of the Philippines

4. cooperatives
• A cooperative is a duly registered association of persons with a common bond of interest, voluntarily joining together to
achieve their social, economic and cultural needs.
• The owners are called members who contribute equitably to the capital of the cooperative.
• The members are expected to patronize their products and services.
• The word ‘cooperative’ appears in the name of the entity.
• This form of business organization is regulated by the Cooperative Development Authority (CDA).

advantages of a cooperative
• Enjoys certain tax exemption privilege
• Promotes the concept of sharing resources
disadvantages of a Cooperative
• Limited distribution of surplus
• Requires continuous education programs for members.
• The members have active and direct participation in the business of the cooperative.