This short series tries to show that the concept of accounting is much broader than most people think. It briefly describes the basic branches of accounting, especially financial and managerial accounting.
This series is freely followed by series Cost accounting.
Term accounting is not the same as financial accounting. It is a broader term that includes a number of branches. The branches differ mainly in the information it supplies and for whom it is intended:
The purpose of financial accounting is to present true and fair information about financial position, financial performance and cash-flow of the entity for the external stakeholders such as shareholders, investors, creditors or government. Financial accounting looks mainly into the history and is (mostly) maintained mandatorily.
Financial accounting can be governed either by generally accepted accounting standards (GAAP such as IFRS or US GAAP) or national law.
Management accounting provides information for decision-making and as such it looks mainly into the future and is prepared for internal use, mainly for managers of the entity. Management accounting uses data from financial accounting, but also from other internal and external sources. There is no requirement to keep management accounting records. Management accounts do not necessarily be in the form of statement of financial position, financial performance and cash-flow. It may contain only a set of analyses e.g. of products, segments, geographic locations etc.
Almost any company is required to maintain financial accounting records for the purpose of financial reporting. Management accounting is voluntary and depends on whether management requires it. If the entity maintains management accounts as well, the accounting system can be organized as:
Cost accounting is a set of management accounting methods, techniques and procedures used mainly to determine actual or planned costs of cost objects (cost center, product, cost unit, department, process, activity).
Cost accounting is not an exact discipline. It involves a set of well tried-out methods or techniques, but very important in its application is also common sense.