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Branches of Accounting

Posted on
  • Saturday, January 10, 2009
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  • Dwi Wahyudi, SE
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  • Different users of accounting information will require different information and use it for different purposes. Accounting can be broken down into three main branches:

    1. Financial accounting is the preparation of financial statements summarizing past events, usually in the form of profit and loss accounts and balance sheets. These historic statements are mainly of interest to outside parties such as investors, loan providers and suppliers.

    2. Management accounting is the provision of much more detailed information about current and future planned events to allow management to carry out their roles of planning, control and decision-making. Examples of management accounting information are product costs and cost data relevant to a particular decision, say, a choice between make or buy. Also included in management accounting is the preparation and monitoring of budgeted costs relating to a product, activity or service. All the above management accounting information is rarely, if ever, disclosed to outside parties.

    3. Financial management covers the raising of finance and its deployment in the various resources needed by a business, in the most efficient way. The cost of capital is influenced by both the capital structure adopted as well as the riskiness of the investments undertaken. Part 3 is devoted to this theme.

    Within these three broad areas of accounting there may be further sub-sets of accounting relating either to one specific activity, or across the whole spectrum. Examples of these are:

    1. Treasury is a finance function usually only found in a very large company or group of companies. It embraces the management of bank balances so as to raise the maximum interest on positive balances, or minimize the payment of interest on negative balances. This might entail lending money overnight on the money markets. Also included here is the management of exchange risk where finan-cial transactions are denominated in foreign currencies.

    2. Taxation in a small company will be included in the duties of the financial accountant who may need to call on outside professional advice from time to time. Corporation tax on company profits is not straight-forward and the system of capital allowances can be complex for some large companies, groups of companies, or multinational companies. Mention should also be made of the ramifications of value added tax (VAT) and the taxation of employee and director benefits in kind. A specialist accountant, or team of accountants, is often appointed in large companies to minimize the pain and maximize the gain from the various taxes and allowances affecting such organizations.

    3. Audit is another accounting function mainly found in larger organizations. Internal auditors monitor that accounting procedures, documents and computerized transactions are carried out correctly. This work is additional or complementary to that undertaken by external auditors who take a broader approach in providing an inde-pendent report to shareholders in the annual report.

    From : Graham Mott

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