Kinds of accounting - Essay Example

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When it comes to a business, different kind of people are related to different aspects of a business; they extract different kind…
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TYPES OF ACCOUNTING and Section # of Kinds of Accounting Accounting is crucial to businesses; it serves a multitude of purpose for the different stakeholders who are involved with the business in any way. When it comes to a business, different kind of people are related to different aspects of a business; they extract different kind of information from the same accounting procedure. Since the accounting serves a wide audience, from the stakeholders to the customers, to the suppliers and the owners of the business, it has been divided into different types. The different types serve different people and provide different information for further analysis.
The three major heads in which accounting is divided are financial accounting, managerial accounting and cost accounting. There are other kinds that have been developing as the world is progressing, but they all come under the three umbrellas one way or the other. For clarification and differentiation amongst the three major heads, a brief discussion is presented below (Peter, 2007).
The basic purpose that financial accounting serves, is to provide the stakeholders with information to make sound economic decisions (Robert, 2004). Reports are made for the external parties such as the investors, creditors and tax authorities, so that they can extract information regarding how the company is doing. Reports include income statements, balance sheets, cash flow statements and other- they provide a complete picture for external parties to make sound decision and compare them with other organizations’ performances. They are guided by the Generally Accepted Accounting Principles (GAAP) (Robert, 2008).
Managerial accounting is another major branch of accounting. It provides information that is crucial for the internal parties or the managers or employees, helping in understanding the running of the businesses. They provide information to the internal stakeholders that help them understanding the management and control functions within the organization. It is forward looking, that is, it is mostly based on projections and assumptions rather than the history of the organization. Management accounting is also termed as cost accounting, where product costing is also a part of managerial accounting. All these types of accounting that come under managerial accounting; help the managers make sound decisions about management and control of the organizational functions (Ray, 2008).
Cost accounting comes under the umbrella of managerial accounting but serves a unique purpose. Cost accounting helps in budgeting, establishing the actual cost that has been incurred, and the budgeted and helps understand the variances that are present in all the types. This information is helpful for internal analysts who develop the reasons for such variances between the actual and budgeted costs. For the profitability of the organization, managers try and bring down the cost of the production and other expenses. As it comes under management accounting, it does not need to follow principles such as the GAAP, as its major receivers are internal stakeholders (Peter, 2008).
The major point of difference between the financial accounting and managerial accounting is that financial accounting serves external stakeholders, whereas managerial serves the internal managers and stakeholders. Therefore, management focuses on managerial and cost accounting, whereas the shareholders look at the financial accounting reports for comparison. Auditors want to look at managerial accounting so that they can audit the information provided by the internal managers and present it to the external stakeholders.
Libby, R., Libby, P., Short, D. (2004). Financial Accounting. McGraw Hill/Irwin
Garrison, R., Noreen, W., Brewer, P. (2008). Managerial Accounting. McGraw Hill.
Eisen, P. (2007). Accounting. Barron’s Educational Series. Read More
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