Types of Accounting

The financial literature classifies accounting into two broad categories, viz, Financial Accounting and Management Accounting. Financial Accounting is primarily concerned with the preparation of financial statements whereas Management Accounting covers areas such as interpretation of financial statements, cost accounting, etc. Both these types of Accounting are studied in detail in the following paragraphs.

Financial Accounting:

As mentioned earlier, financial accounting deals with the preparation of the financial statements for the basic purpose of providing information to various interested groups like creditors, banks, shareholders, financial institutions, government, consumers etc. Financial statements, i.e. the income statement and the balance sheet indicate the way in which the activities of the business have been conducted during a given period of time.

Financial Accounting is charged with the primary responsibility of external reporting. The users of information generated by financial accounting, like bankers, financial institutions, regulatory authorities, government, investors, etc. want the accounting information to be consistent so as to facilitate comparison. Therefore, financial accounting is based on certain concepts and conventions.

The significance of financial accounting lies in the fact that it aids the management in directing and controlling the activities of the firm and to frame relevant managerial policies related to areas like production, sales, financing, etc. However, it results from certain drawbacks which are:

• The information provided by financial accounting is consolidated in nature. It does not include break-up for different departments, processes, products and jobs. As such, it becomes difficult to evaluate the performance of different sub-units of the organisation.

• Financial Accounting does not help in knowing the cost behavior as it does not distinguish between fixed cost and variable cost.

• The information provided by financial accounting is historical in nature and as such the predictability of such information is limited.

The management of a company has to solve certain ticklish questions like expansion of business, making or buying a component, adding or deleting a product line, deciding on alternative methods of production, etc. The financial accounting information is of little help in answering these questions.

The limitations of financial accounting, however, should not lead one to believe that it is of no use. It is the basic foundation on which other branches and tools of accounting analysis are based. It is the source of information, which can be further analysed and interpreted according to the tailor-made requirements of the decision makers.

Management Accounting:

Management Accounting is tailor made accounting. It facilitates the management by providing accounting information in such a way so that it is conducive for policy making and running the day to day operations of the business. Its basic purpose is to communicate the facts according to the specific needs of decision makers by presenting the information in a systematic manner. Management Accounting, therefore specifically helps in planning and control. It helps in setting standards and in case of variances between planned and actual performances, it helps in deciding the corrective actions.

An important characteristic of Management Accounting is that it is forward looking. Its basic focus is one future activity to be performed and not what has already happened in the past.

Since Management Accounting caters to the specific decision needs, it does not rest upon well defined and set principles. The reports generated by the management accountant can be of any duration short or long, depending on the purpose. Further, the reports can be prepared for the organization as a whole as well as its segments.

Cost Accounting:

One important variant of management accounting is the cost analysis. Cost accounting makes elaborate cost records regarding various products, operations and functions. It is the process of determining and accumulating the cost of a particular product or activity. Any product, function, job or process for which costs are determined and interpreted are called Cost Centres.

 The basic purpose of cost accounting is to provide detailed break up of cost of different departments, processes, jobs, products, sales, territories etc, so that the effective cost control can be exercised.

Cost accounting also helps in making revenue decisions such as those related to pricing, product-mix, profit volume decisions, expansion of business, replacement decisions, etc.

The objectives of cost accounting can therefore be summarized in the form of 3 important statements, viz., to determine costs, to facilitate planning and control of business activities and to supply information for short and long term decision. Cost accounting has certain distinct advantages over financial accounting. The cost accounting system provides data about profitable and non-profitable products and activities, thus prompting corrective measures. It is easier to segregate and analyse individual cost items and to minimize losses and wastage arising from the manufacturing process. Production method can be varied so as to minimize the cost and increase profits. Cost accounting help in making realistic pricing decisions in times of low demand, competitive conditions, technology changes etc.

Various alternative courses of action can be properly evaluated with the help of data generated by cost accounting. It would not be an exaggeration if it is said that cost accounting system ensures maximum utilization of physical and human resources. It checks frauds and manipulation and directs the employer and employees towards achieving the organization goal.

Introduction to Accounting- Characteristics Accounting

Accounting is also known as the financial language of the business.

Accounting is a process of identifying, measuring, recording, classifying, summarizing and analyzing the financial transaction of the business.

There are various characteristics of Accounting:

• Identifying various business transaction:  Accounting is a process of identifying various business transactions. Every business has variety of business transactions daily. For example: purchases, sales, other expenses, income from other investments etc. Each business has to identify such financial transactions.

• Measuring the transactions: Every financial transactions has to be measured in terms of money. "Money" in accounting is considered as the common unit and also the common medium of exchange. In India, Rupees is the currency used by every person.

• Recording the transactions: In-order to find out the financial status of the business it is important to record each and every transaction that takes place in business. Therefore, business maintains proper books of accounts known as book keeping. Business has to maintain purchase book for purchases, sales book for sales, cash and bank book for bank and cash related activities, also creditor and debtors book for credit related transactions and journal proper for other transactions. 

• Classifying the transactions: After posting the transactions of business in Journal, all the transactions are then classified into their respective ledgers. For example: if a business is selling mobile phone to a customer in cash, first of all a journal entry will be recorded in Journal and then the ledger posting will be done in cash account and sales account. 

• Summarizing the transactions: After posting the transactions to the respective ledger accounts, it is important to make the accounting information presentable to the users and the owner. This is called summarizing. It involves presenting the classified data in such a manner which can be understandable by the users. It includes Trial Balance, Trading Account, Profit & Loss Account and Balance Sheet.

• Analyzing and Interpreting the Financial data: It is important to analyze the financial data so that the users of financial statements can make sound decisions and proper judgement regarding the investment decisions and other sound decisions.

• Communicating the Financial data and report to the users: If you own a business or a company, it is important to communicate about the financial data or statements of the business, so that the users can take sound decisions regarding the investment in business. Every user is communicated regarding the financial information through the "Annual Report" at the end of the year.

Introduction to Accounting- Meaning & Objectives

Have you ever thought of how large companies like Reliance or Tata interpret their financial position at the end of the year? Do the employees have special power to check the profits or losses of the business?

The answer is big: NO

Definition of Accounts:

Accounts is a process of reporting, recording, interpreting, summarizing, analyzing the economic and financial data of the business or a company. 

Accounting helps the managers or the owners of the company to know the financial status or position of the business. Now-a-days, Accounting is useful for every business and beneficial to all. Many aspects of our lives are dependent on accounts like, personal financial planning, investments, income tax law etc. We have different roles to perform in life- the role of a student,of a family head, of a manager, of an investor etc. The knowledge of accounting is an added advantage to perform these roles. However, we shall limit our scope of discussion to a business organisation and various financial aspects of such an organisation.

Aspects of Accounting:

• Economic Events:  Every business organisation has to go through number of economic events like purchasing the products or selling the products along with transportation or advertising costs, employee salary and other miscellaneous expenses.

• Identification, Measurement, Recording and Communication: The accounting information should be outlined in such a way that right information is identified, measured, recorded and communicated to the right individual at the right time.

• Organization: It refers to the size of the business along with the number of employees and level of business operation.

• Interested users of Information: Customers are the most interested users of information about the business or the companies financial position because accordingly they will take the decision regarding investment in the business or the company.

Objectives of Accounting:

• To maintain a systematic record of business transactions: A normal business conducts various transaction daily. Any human being cannot remember each and every transaction that has taken place in day to day business. Accounting is a process where each and every transaction related to business is recorded first in Journal and posted to ledger followed by preparation of trial balance and then preparing the financial statements.

• To ascertain profits and losses of the business: Any person or any company carrying a business is interested to know the position of the business at the end of the year. Every business has the objective to maximize the profits. Whether the business earned profits or loss is ascertained by preparing profits and loss account or Income statement. A comparison of Income & Expenditure gives either Profits or Losses.

• To depict financial position of the business: A businessman is also interested in ascertaining his financial position at the end of a given period. For this purpose, a position statement called Balance Sheet is prepared in which assets and liabilities are shown. 

• To provide accounting information to the interested users: Apart from owner of the business, there are some other parties like bankers, creditors, tax authorities, investors, researchers etc. who are interested in getting the accounting information of the business. Hence, one of the objectives is to make the accounting information available to the interested users to enable them to take sound and effective decisions. The accounting information is available in the form of "Annual Report".

Accounting is also called as the Financial Language of  the Business.