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Accounting can be divided into several areas of activity. These often overlap and
they are often closely intertwined. But it's still useful to distinguish them, not least
because accounting professionals tend to organize themselves around these various
specialties.
Financial Accounting
Financial accounting involves supplying information internally within the
organization and to external stakeholders including shareholders, creditors and
government/regulatory agencies as required.
Wall Street uses the information from financial statements as the basis of much of
their analysis of publicly-traded companies to determine if their stock is a good
investment. Private companies, including start-ups, also need accurate and
compliant financial statements so potential investors can assess whether they want
to invest capital.
Management Accounting
Where financial accounting focuses on external users, management
accounting emphasizes the preparation and analysis of accounting information
within the organization. According to the Institute of Management Accountants, it
includes "designing and evaluating business processes, budgeting and
forecasting, implementing and monitoring internal controls, and analyzing,
synthesizing and aggregating informationto help drive economic value."
Reports are tailored to the needs of individual managers or functional areas of the
organization such as manufacturing, distribution, sales, marketing or others. The
information should be presented in a fashion that highlights relevant information
that aids operational managers in managing their operation.
The discipline of management accounting arose out of what was originally cost
accounting, the allocation of costs to the proper area of the manufacturing and
distribution process at an industrial company. In recent years, management
accountants have developed new approaches like activity-based costing (ABC) and
target costing, but they continue to debate how best to provide and use cost
information for management decision-making.
Auditing
Auditing is the examination and verification of company accounts and the firm's
system of internal control. There are both external and internal auditors.
External auditors are independent firms that inspect the accounts of an entity and
render an opinion on whether its statements conform to GAAP and present fairly
the financial position of the company and the results of operations. In the U.S.,
four huge firms known as the Big Four PricewaterhouseCoopers, Deloitte
Touche Tomatsu, Ernst & Young, and KPMG dominate the auditing of large
corporations and institutions.
Tax Accounting
Tax accounting is based on laws enacted through the legislative process. In the
U.S., tax accounting involves the application of Internal Revenue Service rules at
the Federal level and state and city laws for the payment of taxes at the local level.
Tax accountants help entities minimize their tax payments. Within the corporation,
they will also assist financial accountants with determining the accounting for
income taxes for financial reporting purposes.
In large, multi-national corporations, tax issues can drive business decisions such
as where to domicile certain operations due to differences in the tax rates paid in
various countries around the globe versus those assessed in the U.S. At the state
level, companies may decide to relocate operations in one state over another due to
differences in tax rates and tax-breaks provided as incentives by some states.
Fund Accounting
Fund accounting is used for nonprofit entities, including governments and not-for-
profit corporations. Rather than seek to make a profit, governments and nonprofits
deploy resources to achieve their objectives. It is standard practice to distinguish
between a general fund and special purpose funds. The general fund is used for
day-to-day operations, like paying employees or buying supplies. Special funds are
established to fund specific objectives, like building a new wing of a hospital.
Segregating resources this way helps the nonprofit maintain control of its resources
and measure its success in achieving its various missions.
While non-profits dont necessarily look to generate a profit, timely and accurate
accounting information is needed to ensure that often-scarce financial resources are
properly managed and that cash shortfalls that could cause the organization to scale
back operations dont occur.
The accounting rules for federal agencies are determined by the Federal
Accounting Standards Advisory Board, while at the state and local level the
Governmental Accounting Standards Board (GASB) has authority.
Forensic Accounting
Finally, forensic accounting is the use of accounting in legal matters, including
litigation support, investigation and dispute resolution. There are many kinds of
forensic accounting engagements: bankruptcy, matrimonial divorce, falsifications
and manipulations of accounts or inventories, and so forth. Forensic accountants
investigate and analyze financial evidence, give expert testimony in court and
quantify damages. Forensic accountants are key players in the investigation of
fraud and may be called in if any red flags are detected by a companys internal
financial group or as a result of a routine audit.
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.
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.
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.
Management accounting and financial accounting are not to be confused with each
other. Both are different. Management accounting serves the needs of the
management in decision makings regarding minimization of the cost factor and
enhancing of profit making. Financial accounting serves the needs of shareholders,
creditors and financial institutions for ascertaining the financial position of the
company. Management accounting records are kept secret for the use of
management only. They are not made public.
Besides the above mentioned three branches of accounting, there are many other
branches which are in practice and very useful for various purposes as mentioned
below:
Tax Accounting deals with taxation matters. Its functions include preparation and
filing of various tax returns and dealing with their legal implications. Tax
accountants aid in minimizing tax payments and also help financial accountants in
preparing financials for tax reporting to various authorities. Tax accounting
involves consultancy regarding the effect of taxes on different aspects of business,
minimizing tax through legal ways and also verifying consequences of tax payable
on business.
Fund Accounting deals with keeping records for funds of non-profit business
entities. Separate fund accounts are maintained for separate works like welfare
schemes of different nature to ensure proper utilization of funds.
2. Accounting: To prepare the Trial Balance and thereby to check the arithmetical
accuracy of the books and records, to prepare the Revenue statements of Profit or
Loss Accounts, to prepare the statement of Affairs or Balance Sheets, or , in other
words, to prepare the Final Accounts and also to make plans and programmes for
smooth running of this part of Accounting procedures and to act accordingly are, in
short, the functions of the Accountant. This of his work is generally termed as
accounting.
5. Decision Accounting: This means that part of the functions of the Accountant by
which he prepares and presents necessary information to the Management for
making decisions. This function is one which has developed a great during the
recent years. As and when there arises a particular problem in any business unit,
the accounting personnel are thereupon called to present the necessary information
in all possible details and in a most appropriate manner. Decision Accounting is
thus, a part of the Managerial Accounting.
For this purpose, the Accounts are to be checked by some qualified persons from
the Book of Prime entry up to the Final Accounts every year. This is also necessary
for the benefit of the share-holders as well as for the Government which will
collect taxes on the basis of the Published Accounts.
DEFINITION OF ACCOUNTING
Nature OF ACCOUNTING
We know Accounting is the systematic recording of financial transactions and
presentation of the related information of the appropriate persons. The basic features of
accounting are as follows:
1. Accounting is a process: A process refers to the method of performing any specific job
step by step according to the objectives, or target. Accounting is identified as a process as
it performs the specific task of collecting, processing and communicating financial
information. In doing so, it follows some definite steps like collection of data recording,
classification summarization, finalization and reporting.
3. Accounting is means and not an end: Accounting finds out the financial results and
position of an entity and the same time, it communicates this information to its users. The
users then take their own decisions on the basis of such information. So, it can be said
that mere keeping of accounts can be the primary objective of any person or entity. On
the other hand, the main objective may be identified as taking decisions on the basis of
financial information supplied by accounting. Thus, accounting itself is not an objective,
it helps attaining a specific objective. So it is said the accounting is a means to an end
and it is not an end in itself.
4. Accounting deals with financial information and transactions; Accounting records the
financial transactions and date after classifying the same and finalizes their result for a
definite period for conveying them to their users. So, from starting to the end, at every
stage, accounting deals with financial information. Only financial information is its
subject matter. It does not deal with non-monetary information of non-financial aspect.