Monday, April 9, 2012

What are the different branches of accounting?

Every organisation has a wide range of stakeholders who are interested in the performance or activities of that organisation. Stakeholders are simply any person(s) that are directly or indirectly affected by the activities of the organisation.

branches of accountingFor example, business managers need accounting information to assist them in making sound decisions. Investors watch the profits in the hope of 'dividends'.Creditors and lenders are watchful of the organisation’s ability to meet its financial obligations. Governmental agencies need information to ensure the correct tax was collected and to regulate business activities. Brokers and business analysts use financial information to form an opinion on investment recommendations. Employees chose successful companies that enhance their career prospects, and they often have bonuses or share options that are tied to enterprise performance. This a but a small sample of people that are interested in the financial information of an organisation.

Now for reporting purposes, accountants group these stakeholders into 2 main user group:

External users who are outside the organisation like Governmental agencies, Lenders, Investors (Owners), Creditors, Suppliers, Customers, Trade associations and society at large.
Internal users who are inside the organisation like a Board of directors, Chief executive officer (CEO), entrepreneurs, Chief financial officer (CFO) , Vice presidents, employees and Line managers like Business unit managers, Plant & Store managers.
Accounting information and financial reports designed for external users is called Financial Accounting whereas Managerial Accounting provides accounting information to internal users that is most useful in the management of a company. Now whilst the reporting styles in each branch are vastly different, the underlying objective is the same - to satisfy the information needs of the user.

Financial Accounting
Financial accounting is focused on producing a limited set of specific prescribed financial statements in accordance with generally accepted accounting principles. The central outputs from financial accounting are audited financial statements such as the balance sheet and income statement that provides a scorecard by which a company's overall past performance can be judged by outsiders.

This branch of accounting targets those external stakeholders that have an interest in the reporting enterprise, but that are not involved in the day-to-day operations. The reports produced by this branch are used for so many different purposes that it is often called “general-purpose accounting”. In addition to the financial statements, external stakeholders also have access to financial reporting via press releases that are sent directly to investors and creditors or via the open communications of the internet.

The emphasis in financial accounting is on summaries of financial consequences of past activities and decisions. So, only summarized data is prepared, that covers the entire organization. The data prepared must be objective, precise and be verifiable, usually by an outside 'auditor'. This style of reporting must follow the generally accepted accounting principles that are set by peak accounting bodies in conjunction with government agencies. The numbers used in financial accounting are historical in nature.

Now whilst appearing set in stone, financial statements are actually based on estimates, judgments, and assumptions. This is why financial statements usually include ‘notes to the accounts’ which are the explanations from management that help explain and interpret the numerical information. A more specialized area of financial accounting is Tax Accounting.

Entrepreneurs rely heavily on the specialist knowledge and skill of the accountant to perform this function but entrepreneurs should still play a part in the process. Ideally they would scan the detailed general ledger looking for anomalies, they would make sure their stock take was carried out and calculated according to their accountants instructions, they would scan the financial reports looking for any numbers that 'didn't seem right'. These should be discussed with the accountant before the reports are sent because whilst accountants know all about accounting they know a lot less about your business than you do.


Types of Accounting
Different Types of Accounting Information Systems

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