Define Accounting? Explain the branches of Accounting.

Accounting: Accounting is the process of systematically recording, measuring, and

communicating information about financial transactions.

At the heart of accounting is the double-entry bookkeeping method. This involves making at
least two recording entries for every transaction: a debit in one account and a credit in another
account. The method helps prevent errors because the sum of the debits should equal the sum of
the credits. The three major financial statements produced by accounting are the statement,
the balance sheet, and the cash flow statement.

Accounting can be done on a cash basis (cash accounting) or on an accrual basis (accrual
accounting). Cash accounting records cash inflows and outflows in the period in which they
occur. Accrual accounting records income and expenses in the period to which they are
attributable rather than when cash payments come and go. For example, a check written in April
for March's utilities would appear as a March expense under the accrual method and as an April
expense under the cash method.

There are two general kinds of accounting. Financial accounting is the recording and
communication of economic information in accordance with Generally Accepted Accounting
Principles (GAAP) and is primarily for external users. Managerial accounting is the recording
and communication of economic information that may or may not be in accordance with GAAP
and is for internal users. Other accounting specialty areas exist, such as tax accounting, oil and
gas accounting, or forensic accounting.

There are two kinds of users of accounting information: internal users and external users.
Internal users are usually company managers who use accounting information to decide how to
plan and control operations on a daily and long-term basis. External users are existing or
potential investors, creditors, analysts, financial advisers, regulatory authorities, unions, and the
general public. They use accounting information to make a myriad of decisions about whether to
buy, hold, sell, lend, continue a relationship, or make an agreement.

The Financial Accounting Standards Board (FASB), the Securities and

Exchange Commission (SEC), the IRS, and other regulatory bodies set accounting standards and
requirements for accounting frequency and presentation.

Accounting is tremendously important because it is the language of business, and it is at the root
of making informed business decisions. Without accounting, managers would not know which
products were successful, which business decisions were the right ones, and whether the
company was earning money. It would not know how much to pay in taxes, whether to lease or
buy an asset, or whether to merge with another company. In short, accounting doesn't just count
the beans, it measures a company's success at meeting its goals and it helps investors understand
how efficiently their economic resources are being used. This is why companies must be
proficient in accounting in order to make good decisions.

Accounting can be controversial, in that accounting rules and methods are sometimes subject to
interpretation or can appear to distort a company's true performance. This is another important
reason that effective leaders and managers must thoroughly understand the accounting impact of
their decisions.

The famous branches or types of accounting include: financial accounting, managerial

accounting, cost accounting, auditing, taxation, AIS, fiduciary, and forensic accounting.

1. Financial Accounting

Financial accounting involves recording and classifying business transactions, and preparing and
presenting financial statements to be used by internal and external users.

In the preparation of financial statements, strict compliance with generally accepted accounting
principles or GAAP is observed. Financial accounting is primarily concerned in
processing historical data.

2. Managerial Accounting

Managerial or management accounting focuses on providing information for use by internal

users, the management. This branch deals with the needs of the management rather than strict
compliance with generally accepted accounting principles.

Managerial accounting involves financial analysis, budgeting and forecasting, cost analysis,
evaluation of business decisions, and similar areas.

3. Cost Accounting

Sometimes considered as a subset of management accounting, cost accounting refers to the

recording, presentation, and analysis of manufacturing costs. Cost accounting is very useful in
manufacturing businesses since they have the most complicated costing process.

Cost accountants also analyze actual and standard costs to help managers determine future
courses of action regarding the company's operations.
4. Auditing

External auditing refers to the examination of financial statements by an independent party with
the purpose of expressing an opinion as to fairness of presentation and compliance with
GAAP. Internal auditing focuses on evaluating the adequacy of a company's internal control
structure by testing segregation of duties, policies and procedures, degrees of authorization, and
other controls implemented by management.

5. Tax Accounting

Tax accounting helps clients follow rules set by tax authorities. It includes tax planning and
preparation of tax returns. It also involves determination of income tax and other taxes, tax
advisory services such as ways to minimize taxes legally, evaluation of the consequences of tax
decisions, and other tax-related matters.

6. Accounting Information Systems

Accounting information systems (AIS) involves the development, installation, implementation,

and monitoring of accounting procedures and systems used in the accounting process. It includes
the employment of business forms, accounting personnel direction, and software management.

7. Fiduciary Accounting

Fiduciary accounting involves handling of accounts managed by a person entrusted with the
custody and management of property of or for the benefit of another person. Examples of
fiduciary accounting include trust accounting, receivership, and estate accounting.

8. Forensic Accounting

Forensic accounting involves court and litigation cases, fraud investigation, claims and dispute
resolution, and other areas that involve legal matters. This is one of the popular trends in
accounting today.

Focusing on a Specialization

If you want to focus on a specialization, you may want to consider obtaining an accounting
certification in your chosen field. It will give you an edge over those who are uncertified. Due to
the increasing population and demand for competitive professionals, you need to step it up a little
to get recognized.