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BRANCHES OF
ACCOUNTING
- To differentiate the branches
of accounting and explain the
kind or type of services
rendered in each of these
branches
Learning Objective
- Understanding of the branches of accounting
and solve exercises in the identification of
these branches described through the types
of services rendered
Key Understanding
What are the branches of accounting?
Key Question
1. Financial accounting
2. Management accounting
3. Government accounting
4. Auditing
5. Tax accounting
6. Cost accounting
7. Accounting education
8. Accounting research
Branches of Accounting
- Financial accounting is a branch of accounting primarily handling the recording of financial transactions of a business. The financial transactions are later summarized into standardized accounting reports, more popularly known as the financial statements, for the benefit of internal and external users.
- Financial statements should provide information useful to a wide range of users in their economic decisions. This is the main reason why accounting standards such as the Philippine Financial Reporting Standard (PFRS) and the Philippine Accounting Standards (PAS) are created. The PFRS and PAS supply guidelines on how companies should prepare their financial statements. Standardized financial statements allow the users to compare the results of operations of different companies regardless of size and nature.
Financial Accounting
- Likewise, standardized financial statements are also useful for creditors. Besides enhancing comparability, standardized financial reports improve the understandability of the company’s financial statements. Creditors will be able to assess the riskiness of a company through the well-presented financial statements.
- As stated above, financial accounting caters to the need of both internal and external users. However, it is evident that financial accounting’s main goal is to provide the information needs of external users that have no capability to request information directly from management..
Financial Accounting
- Are the financial statements prepared to accommodate the information needs of persons who have no capability to request or acquire information directly from the company?
- If the answer is yes, the financial statements are called general purpose financial statements. Otherwise, the financial statements are called special purpose financial statements.
General Purpose Financial Statements
Primary Users of General Purpose Financial Statements Primary Users of Special Purpose Financial Statements
- Investors
- Creditors • Shareholders/Stockholders
- Government Agencies
- Auditors • Other interested outside parties
- Top management (e.g., Board of directors of a company, CEO, CFO, COO)
- Department managers (e.g., sales
- Other internal parties^ manager, production manager)
General Purpose Financial Statements
Predominantly, external parties use general purpose financial statements to evaluate the performance of the company. On the other hand, specific purpose financial statements are utilized by internal parties to guide them in the decision-making process for the company.
- Management accounting is a branch of accounting which focuses on the preparation of financial reports used by managers in their day-to-day decision making.
- Reports generated using management accounting are for internal users only. As such, management reports need not follow accounting standards such as the PFRS and PAS.
- Additionally, unlike financial reports that are generated quarterly, semi-annually, or annually, management reports can be done daily, weekly, or whenever managers require a specific report.
- Management reports typically contain information regarding the amount of cash on hand, the level of sales revenue for a particular period, costs incurred, or even the comparison of actual results with budgeted amounts.
Management Accounting
- Aside from the frequency and the intended users of reports, management accounting differs from financial accounting in the nature of information produced.
- Financial accounting summarizes financial information gathered within a specified period. Thus, financial accounting provides information that is historical. Meanwhile, management accounting information is forward-looking. It contains forecasted information used by managers in planning.
Management Accounting
Role of Management Accountants
According to the Chartered Institute of Management Accountants (CIMA), chartered management accountants perform the following roles: Advise managers about the financial implications of projects Explain the financial consequences of business decisions Formulate business strategy Monitor spending and financial control Conduct internal business audits Explain the impact of the competitive landscape Bring a high level of professionalism and integrity to the business
Management Accounting
Analysis. Management accountants should be able to analyze information and use it to make business decisions. Strategy. Management accountants should be able to formulate business strategies that will increase the company’s wealth and create value for the company’s shareholders. Risk. Management accountants should be able to identify risks that can potentially have detrimental effects to the company. At the same time, management accountants should give recommendations on how to manage such risks. Planning. Management accountants should be able to apply accounting techniques in the planning and budget creation phase of a business. Communication. Management accountants should be able to identify what information the management needs and also explain the numbers to nonfinancial managers.
Management Accounting Skill Set
- An audit of the financial statements improves their credibility.
Financial statements that underwent the process of auditing
are called audited financial statements. A set of the financial
statements will only be useful to users after it has gone
through the process of auditing.
- Audited financial statements are accompanied by the auditor’s
opinion. The auditor’s opinion will be the basis whether or not
the financial statements are prepared truthfully and without
any material errors.
Auditing
- The recording of financial transactions mentioned in the
previous chapter follows specific guidelines provided by
the PFRS and PAS. Tax accounting records some
financial transactions in a different manner. It adheres to
some guidelines in the PFRS and PAS, but it is not
required to implement everything written in such
standards.
- Tax accounting follows the pronouncements of the
National Internal Revenue Code (NIRC). The NIRC is to
tax accounting as the PFRS and PAS are to financial
accounting.
Tax Accounting
- To illustrate the difference, let us look at a particular
example. Starbucks offers its customers a card that you
can use to pay for your orders. The process is simple.
You ask the cashier to load the card; you pay for the
amount of load; and then your card will reflect the
balance available for you to use. You can use the card
for future transactions with Starbucks. Under the PFRS
and PAS, Starbucks will not recognize the amount you
paid as revenue until you use the balance in your card in
the future. Under the NIRC, Starbucks recognizes the
revenue when the company received the payment from
you. Thus, if Starbucks recognizes the revenue, it is
taxable.
Tax Accounting
- Tax accounting enables the taxing authorities to collect taxes
that differ from the amount due computed using the financial
accounting standards.
- Another key difference lies in the type of report generated.
Financial accounting generates reports known as the financial
statements while tax accounting produces tax returns to be
filed to the appropriate government agencies.
Tax Accounting
- Cost accounting is a branch of accounting that provides
information for management accounting and financial
accounting (Horngren et al. ).
- For example, cost accounting helps measure the cost of
a bicycle for a bicycle-selling company. This information
supports management in deciding how many bicycles to
produce, the selling price of the bicycle, or valuing the
inventory of bicycles in the company’s financial
statements.
Cost Accounting
Terms Used in Cost Accounting Cost – the resource sacrificed to achieve an objective (e.g., money, resources, time, etc.) Cost object – anything that you wish to find the cost of (e.g., cost of a pair of jeans, cost of a pair of Jordan XI shoes) Cost driver number of working hours is related to the amount of salaries a company – an activity that is a cause of the incurrence of costs (e.g., the pays) Direct cost materials, labor, etc.) – costs that can economically be traced to a cost object (e.g., Indirect cost – costs that cannot be traced to a cost object (e.g., costs of supplies used in the factory, salary of supervisor overseeing factory operations, etc.) Fixed cost – costs that do not change within a relevant range of activity (e.g., rent of a factory building, insurance costs, etc.) Variable cost – costs that change as the level of activity or production increases (e.g., materials cost, labor cost, selling cost, etc.)
Cost Accounting
- The Bachelor of Science in Accountancy (BSA) in the Philippines is normally a 5-year course composed of subjects in accounting, audit, administration, and business laws and taxation. Although the subjects usually highlight the business environment, the scope of the topics in BSA also covers other fields such as banking and finance, government, nonprofit organizations, and the academe. Students of the course are also trained to create and understand computerized accounting systems to cope with the rapidly changing technology.
- Most schools use a combination of diverse teaching techniques to explain accountancy to students. Some of these methods are classroom discussions, case analysis, individual and group reporting, feasibility studies, and lectures from renowned individuals in the field. Other schools require students to undergo an internship program equivalent to one subject. This is to enable the students to have a feel of the application of accounting in real life.
Accounting Education
Admission Requirements for BSA Must be a high school graduate Must have a college entrance examination of above average or depending on the specific rating set by the school Aside from the college entrance examination, must pass the separate aptitude test specific for BS in Accountancy Must pass the interview conducted by the college admission officer Some schools require a high school QPA of 85% and above with no grade less than 80% in all subjects There are schools who require students to have an 85% or higher average rating in the National Secondary Assessment Test (NSAT) As set by CHED, all schools must conduct an English Proficiency examination to all BS in Accountancy applicants Admission for Philippine Educational Placement Test (PEPT) passers mainly depends on the school’s discretion since some colleges and universities offer only selected courses
Accounting Education
Board Exam
Before a BSA graduate can practice accountancy, he/she
needs to pass the Certified Public Accountant Licensure
Examination. The CPA Licensure Exam is a comprehensive
test composed of 7 subjects. Each subject will be taken within
3 hours so the exam will be for 21 hours all in all. A candidate
should achieve a general average of at least 75% with no
rating below 60% in any of the 7 subjects in order to pass the
exam.
Accounting Education
Accounting research , as the name suggests, is a branch of accounting that deals with the creation of new knowledge. Combining the models produced by the hard sciences in research and testing with financial statements, stock prices, surveys, and experiments, we can gain a specific perspective and basis on the following: Deciding and implementing new accounting and auditing standards Presenting unusual economic transactions in the financial statements Learning how new tax laws impact clients and employers Discerning how the accounting profession affects the capital markets through academic accounting research Researchers in the accounting field also apply the scientific method like their counterparts in the sciences. With the constantly evolving field of accountancy, it is expected that accounting research will continue to play a vital role in the future.
Accounting Research
