8 BRANCHES OF ACCOUNTING

1. Financial Accounting
Definition: The process of preparing financial statements that provide an overview of a company’s
financial performance and position for external stakeholders.
Example: A company prepares an annual income statement, balance sheet, and cash flow statement to
report its financial results to investors and creditors.
2. Management Accounting
Definition: The branch of accounting focused on providing internal management with information for
decision-making, planning, and control.
Example: A manager analyzes monthly budget reports to assess departmental performance and make
informed decisions about resource allocation.
3. Government Accounting
Definition: The field of accounting that deals with the financial management and reporting of public
sector entities, ensuring accountability and transparency in the use of public funds.
Example: A local government prepares financial statements to show how tax revenues are being spent
on public services like education and infrastructure.
4. Auditing
Definition: The examination of financial statements and records to ensure accuracy, compliance with
accounting standards, and the absence of fraud.
Example: An independent auditor reviews a company’s financial statements and issues an audit report
confirming whether they are presented fairly in accordance with GAAP (Generally Accepted Accounting
Principles).
5. Tax Accounting
Definition: The area of accounting focused on tax compliance and planning, ensuring that individuals
and businesses meet their tax obligations.
Example: A tax accountant prepares a business’s tax return, taking advantage of deductions and credits
to minimize tax liability while complying with tax laws.
6. Cost Accounting
Definition: The process of analyzing and allocating costs associated with production and operations to
help management make informed pricing and budgeting decisions.
Example: A manufacturing company uses cost accounting to determine the total cost of producing a
product, including materials, labor, and overhead, to set appropriate pricing.
7. Accounting Education
Definition: The teaching and learning of accounting principles and practices, preparing individuals for
careers in accounting and related fields.
Example: A university offers a Bachelor’s degree in accounting, covering topics like financial accounting,
managerial accounting, and auditing, alongside preparation for CPA certification.
8. Accounting Research
Definition: The systematic investigation into accounting issues, practices, and theories to contribute to
the body of knowledge in the field.
Example: Researchers conduct studies on the effects of new accounting standards on financial reporting
and how they impact investor decision-making.
 INTRODUCTION OF ACCOUNTING

Accounting

 the process of identifying, measuring, and communicating financial information to allow users to
make informed judgments and decisions
 the art of recording, classifying, and summarizing transactions and events which are financial
and are quantifiable in terms of money
 the purpose of accounting is to provide quantitative financial information to help make decisions

Bookkeeper

Definition: A bookkeeper is responsible for recording financial transactions and maintaining

Accountant

Definition: An accountant is a professional who analyzes, interprets, and reports on financial data. They
often have more advanced education and are typically involved in higher-level financial decision-making.

Nature of Accounting
1. Systematic Process

Accounting is a structured process that involves identifying, measuring, recording, and communicating
financial information. This systematic approach ensures accuracy and consistency in financial reporting.

2. Financial Information

The primary focus of accounting is to provide relevant financial information that helps stakeholders make
informed decisions. This includes information on assets, liabilities, equity, revenue, and expenses.

3. Double-Entry System

Accounting operates on the double-entry principle, meaning every transaction affects at least two
accounts, ensuring the accounting equation (Assets = Liabilities + Equity) remains balanced.

4. Compliance and Standards

Accounting must adhere to established standards and regulations, such as Generally Accepted
Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). Compliance ensures
transparency and comparability in financial statements.

5. Historical and Predictive

While accounting primarily records historical financial data, it also involves forecasting future financial
performance through budgeting and financial analysis.
6. Quantitative Nature

Accounting is inherently quantitative, relying on numerical data to represent financial performance and
position. This numerical focus allows for objective analysis and comparison.

7. Decision-Making Tool

Accounting serves as a critical tool for decision-making, providing insights that guide management,
investors, creditors, and other stakeholders in assessing financial health and making strategic choices.

8. Ethical Considerations

Ethics play a significant role in accounting. Professionals must uphold integrity, objectivity, and
confidentiality in their work to maintain trust and credibility with stakeholders.

9. Dynamic Field

Accounting is continuously evolving due to changes in technology, regulations, and business practices.
Professionals must stay updated on trends, tools, and standards to remain effective.

1. Assets

Definition: Assets are resources owned by a business that are expected to provide future economic
benefits. They can be classified as current or non-current.

 Current Assets: Assets expected to be converted to cash or used up within one year. Examples
include cash, accounts receivable, inventory, and short-term investments.

 Non-Current Assets: Long-term resources that will provide benefits for more than one year.
Examples include property, plant, equipment, and intangible assets like patents.

2. Liabilities

Definition: Liabilities are obligations or debts that a business owes to outside parties. They can also be
classified as current or non-current.

 Current Liabilities: Obligations due within one year. Examples include accounts payable, short-
term loans, and accrued expenses.

 Non-Current Liabilities: Long-term debts that are due beyond one year. Examples include long-
term loans and bonds payable.

3. Equity

Definition: Equity represents the residual interest in the assets of the business after deducting
liabilities. It reflects the ownership interest of shareholders in the company.
Revenue

Definition: Revenue, often referred to as sales or turnover, is the income generated from normal
business operations. It represents the total amount earned from selling goods or services before any
costs or expenses are deducted.

 Types of Revenue:

o Operating Revenue: Income earned from the core activities of the business (e.g., sales
of products or services).

o Non-Operating Revenue: Income generated from secondary activities, such as interest,

Expenses

Definition: Expenses are the costs incurred in the process of earning revenue. They represent the
outflow of resources (cash or otherwise) used to generate revenue.

 Types of Expenses:

o Operating Expenses: Costs directly related to the day-to-day operations, such as salaries,
rent, utilities, and raw materials.

o Non-Operating Expenses: Costs not directly tied to core business activities, such as
interest expenses or losses from asset sales.

Profitability

Definition: The relationship between revenue and expenses determines a company’s profitability:

 Net Income: Calculated as Net Income = Revenue - Expenses. If revenue exceeds expenses, the
company has a profit; if expenses exceed revenue, the company incurs a loss.

Capitals

Definition: Capital refers to the financial resources that owners invest in a business. It represents the
ownership equity in the business and can come from various sources.

 Types of Capital:

o Owner’s Capital: The initial investment made by the owner(s) or shareholders in the
business. This can include cash, assets, or property contributed to start or grow the
business.

o Equity Capital: Funds raised by issuing shares to investors, representing ownership

o Retained Earnings: Profits that are reinvested in the business instead of being
distributed as dividends. This is considered a part of the owner's equity.
Drawings

Definition: Drawings refer to the amounts withdrawn by the owner(s) from the business for personal
use. These withdrawals reduce the capital invested in the business.

 Characteristics of Drawings:

o Drawings are not considered business expenses; rather, they are distributions of the
owner's equity.

o They can be made in cash or in kind (e.g., personal use of business assets).
 The Main Books of Accounts

A journal in accounting is a record where all financial transactions are initially documented. It serves as
the first step in the accounting cycle and helps maintain a chronological order of transactions. Here’s a
more detailed overview:

Key Features of a Journal

1. Chronological Order: Transactions are recorded in the order they occur, which helps track the
timing of financial events.

2. Double-Entry System: Each transaction is recorded with at least two entries—debits and credits
—following the double-entry accounting principle. This ensures that the accounting equation
(Assets = Liabilities + Equity) remains balanced.

3. Types of Journals:

o General Journal: Used for any transactions that don’t fit into other specific journals. It’s
a catch-all for miscellaneous entries.

o Special Journals: Designed for specific types of transactions, such as:

 Sales Journal: Records all sales of goods or services.

 Purchases Journal: Records all purchases of inventory or supplies.

 Cash Receipts Journal: Tracks all cash inflows.

 Cash Payments Journal: Tracks all cash outflows.

Key Features of a Ledger

1. Account Organization: The ledger contains separate accounts for each category of assets,
liabilities, equity, revenue, and expenses. This allows for easy tracking of financial performance
over time.

2. Double-Entry Accounting: Each transaction recorded in the journal is posted to the ledger
accounts, ensuring that the accounting equation (Assets = Liabilities + Equity) remains balanced.

3. Types of Ledgers:

o General Ledger: The main ledger that includes all accounts for the business. It
summarizes all financial transactions and is used to prepare financial statements.

o Subsidiary Ledgers: These break down specific accounts from the general ledger into
more detail. Common subsidiary ledgers include:

 Accounts Receivable Ledger: Tracks amounts owed by customers.

 Accounts Payable Ledger: Tracks amounts owed to suppliers.

 Inventory Ledger: Monitors inventory levels and costs.