Branches of Accounting

Nowadays, organisations are expanding rapidly. The pace of economic development can be primarily attributed to technological advancements. With an increase in the complexity of operations, the scope of management has also been widened.

This has led to the development of some specified branches of accounting such as financial accounting, cost accounting, management accounting, social responsibility accounting, human resource accounting, national accounting, etc.

3 Branches of Accounting

Let us now study about three major branches of accounting:

• Financial Accounting
• Cost Accounting
• Management Accounting

Financial Accounting

Financial accounting is a branch of accounting that is primarily concerned with the generation of financial information for internal and external stakeholders but primarily for external ones. The external user groups include creditors, lenders, investors, employees, customers, tax authorities, regulatory agencies and so on.

Financial accounting deals with recording, classifying and summarising business transactions that have already occurred and are historical in nature. Traditionally, financial accounting focussed on creating information on an organisation’s income and financial position based on events occurred during a period of time. However, in recent times, providing information on cash flows and earnings per share is also a part of pub- lished financial statements.

Cost Accounting

Cost accounting was developed as a result of the limitations of financial accounting. It is a branch of accounting that is concerned with the ascertainment of past, present and future costs of products or services. Cost accounting also relates to the determination of costs of products and services. Although the management uses financial information contained in financial statements prepared by financial accounting, it also requires detailed information which can be provided by cost accounting.

The most important function of cost accounting is to determine costs, control costs and provide costing information to management so that they are able to make informed decisions. The management uses cost accounting information to optimise the utilisation of scarce resources and control the expenditure incurred under various heads. This helps in increasing the overall profitability of the organisation.

Management Accounting

The information provided by financial accounting is crucial but not ad- equate for the smooth, orderly and efficient functioning of a business. The management of an organisation requires more information to perform stewardship, planning, control and decision-making functions. Any form of accounting that helps in providing information to all levels of management for planning and controlling an organisation’s activities in addition to making decisions is called management accounting.

Management accounting involves identifying, presenting and interpreting financial data for strategy formulation, effective utilisation of resources, maintaining assets and presenting relevant data to managers.

In the Financial Accounting Series, you will study about the various aspects of financial accounting and how financial reports are prepared. Cost accounting and management accounting are separate areas of study which are beyond the scope of this book.