The present age is the age of competition. There is a struggle for existence in every area of life, including in the field of business, which consists of trade, commerce, industry, and direct services.
It is necessary for every business to carry on its activities with the greatest possible level of efficiency so as to ensure the optimal utilization of the limited resources at its disposal.
Accounting plays an important role in the efficient and successful running of any business. In fact, the planned development of any business concern is possible only if financial data are collected and analyzed in a systematic manner.
Achieving this is only possible if an effective system of accounting is in use. Therefore, given the importance of accounting, this article describes the different types (or “branches”) of accounting.
Branches or Types of Accounting: Overview
The following are the major branches or types of accounting:
- Financial accounting
- Cost accounting
- Management accounting
An overview of these three branches is given in the rest of this article.
1. Financial Accounting
Financial accounting (also known as general accounting) is considered the original form of accounting. It provides a record of business transactions in financial terms and also the periodical preparation of financial statements from these records.
Financial accounting is the art (or process) of recording, classifying, and summarizing the transactions of financial nature in a systematic manner and interpreting the results thereof.
Financial accounting is the traditional form of accounting. It is mainly concerned with recording the business’s day-to-day transactions in the proper books of account, the aim being to enable the preparation of the profit and loss account and balance sheet.
The profit and loss account discloses the net profit or the net loss of the business for some specified period, while the balance sheet shows the company’s financial position at a certain date.
The information generated from financial accounting is useful for various types of users, including:
The main purpose of financial accounting is to ascertain profit and loss made by the business during a particular period, as well as to indicate the financial position of the business entity on a particular date.
In other words, financial accounting helps in determining the true financial results of a business. It provides helpful information to various stakeholders of the business, even those who do not play an active role.
2. Cost Accounting
Cost accounting is the art (or process) of recording, analyzing, and classifying expenditures for the purpose of product costing or service costing, ascertaining profitability, and facilitating operational planning and cost control.
Cost accounting is a forward-looking approach that is related to the recording, analysis, and classification of expenditures with the object of determining the total and per-unit cost of a product or service.
In organizations, cost accounting is an internal aspect that measures operational efficiency and assists the management to maintain the lowest possible costs, consistent with efficient operating conditions.
Standard costing, budgetary control, and marginal costing are some of the dynamic techniques of cost accounting that are widely used nowadays.
Cost accounting emphasizes the importance of identifying production and distribution costs. It helps a firm’s management team to control costs. An efficient costing system is an important factor for industrial control.
Cost accounting is used to calculate the cost of a unit purchased. It also helps in measuring and controlling costs and, in this way, increases profits. Cost accounting data are generated through managerial accounting.
3. Management Accounting
Management accounting, also known as managerial accounting, is based on the conceptualization of accounting as a tool by which managerial effectiveness is enhanced.
It provides essential information that a firm’s management needs to execute its functions. It seeks to make managerial control more effective by encouraging efficient planning.
To guard against error and fraud, management accounting also provides built-in checks and balances, as well as mechanisms for continuous review. As such, it helps management to correct mistakes and improve methods.
Management accounting is the presentation of accounting information in such a way as to assist the management in the creation of policy and in the day-to-day operations of an undertaking.
This type of accounting relates to the use of financial and cost data for the purposes of evaluating the performance of the business as a whole, as well as the various departments comprising it, in relation to pre-determined targets.
Management accounting also assists in reviewing existing policies, making decisions about new policies, and facilitating forward planning.
At its core, management accounting is concerned with providing useful information for managerial decision-making, ensuring that a company’s management can deal with various relevant issues.