Wednesday, 10 September 2014

Three Branches of Accounting: Costing. Financial Accounting and Management Accounting

Any Business or Trade needs the maintenance of records for different purposes. The owner of a business wants to know how much profit he is making and what are his assets and liabilities at any time. The government requires a proper filing of records and tax payments. The manager is worried about how to control costs and bring profit to the company. So, any accounting principle needs to satisfy all these people with accurate information. To satisfy these needs of different groups of people, different types of accounting branches have come into being according to their basic purposes. The three most important and main branches of accounting are known as Cost Accounting, Financial Accounting and Management Accounting.

Let us now discuss these branches one by one.

Cost Accounting

Cost accounting deals with the identification of the cost of production. It analyses the cost of the finished product through various intermediary and final output stages. For example, it deals with the cost of the raw material, semi-finished goods and finished goods one-by-one and side-by-side. Finished product cost includes other costs also like administrative cost, marketing cost and selling expenses and some other elements like interest and depreciation. So all the required information needs to be kept accurately to determine the cost at each stage. This is possible through cost accounting records.

The total costs incurred like salaries, wages, administration expenses are maintained product-wise and stage-wise for each process and product to calculate costs at different stages and for different products individually. Only then can the management control the costs at each level and determine the price for selling the product.

Financial Accounting

This branch deals with maintenance of accounting records like Cash book, Bank book, Main ledger (General Ledger), Customers and Sales Books and Purchase Ledger, etc. All these records are to be perfectly maintained accurately to prepare the Profit & Loss Account and Balance Sheets of the company which enables the Taxman to verify whether the tax is being properly calculated and deposited. It also enables the management and Board of Directors to know about the financial position of the company.

Management Accounting

This also is an important accounting branch. This branch deals with the preparation of various monthly, weekly and yearly reports of Cash Flow, Funds Flow and Budget estimates compared with actual expenses. These reports give the management from time to time, the information regarding the progress of the company, its financial status, and makes them take important decisions for an efficient running of the business.

Besides these main branches of accounting, there are other branches like Government accounting, Tax accounting, Audit accounting, Fiduciary accounting (dealing with accounts on behalf of other minors) and Fund accounting, etc.

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