{"id":20,"date":"2018-10-11T04:46:29","date_gmt":"2018-10-11T04:46:29","guid":{"rendered":"http:\/\/mgmtp02.epgpbooks.inflibnet.ac.in\/?post_type=chapter&p=20"},"modified":"2019-01-03T10:02:03","modified_gmt":"2019-01-03T10:02:03","slug":"branches-of-accounting-advantages-limitation-of-accounting-uses-of-accounting-information","status":"publish","type":"chapter","link":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp02\/chapter\/branches-of-accounting-advantages-limitation-of-accounting-uses-of-accounting-information\/","title":{"rendered":"Branches of Accounting, Advantages & Limitation of Accounting, Uses of Accounting Information"},"content":{"raw":"
\"epgp<\/a>\r\n<\/span><\/div>\r\n
\r\n\r\n \r\n\r\n \r\n\r\nLEARNING OBJECTIVES:<\/strong>\r\n\r\n \r\n

After going through the module, students may be able to gain understanding on the various branches of accounting. Along with this, the advantages and disadvantages are also made clear in the module, along with some of the uses of accounting information.<\/p>\r\n \r\n\r\nINTRODUCTION:<\/strong>\r\n\r\n \r\n

Business transactions are the evidence of the operations of the business with the outside world, and to keep a record of with whom the business is dealing with, from where it is purchasing its raw materials, from whom they are borrowing loans and advances, who are the customers of the business and the profits earned and losses incurred, accounting principles are followed. And these set of accounting information serves as a base for the decision making concerning the business.<\/p>\r\n \r\n

Accounting is a process which starts after the completion of Book Keeping, in other words after the transactions are recorded, classified and summarised, the next step of communicating it to the interested users for their uses begins. There are many users of accounting information and it is used up for many different purposes as well. The existence of Accounting dates back to 4500 B.C. where the sale and purchase of items was recorded on the clay tablets. With the passage of time, new dimensions were added in the field of accounting and it was used up as a service activity, the main function being supplying the quantitative information about economic activities of the business.<\/p>\r\n \r\n\r\n \r\n\r\nMEANING OF ACCOUNTING:<\/strong>\r\n\r\n \r\n

According to A.I.C.P.A., \u201cAccounting may be defined as the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events, which are in part, at least of financial character, and interpreting the results thereof.\u201d<\/p>\r\n \r\n

Basically, accounting is the art and science of communicating the reliable, accurate, understandable information to the management and other users for the purpose of making decisions affecting the working of business. Accounting is a process requiring skill and expertise, divided into various branches, having benefits to the business and affected by some of the limitations as well.<\/p>\r\n \r\n\r\nBRANCHES OF ACCOUNTING:<\/strong>\r\n\r\n \r\n

The technological advancements and globalisation has resulted in an overall rise in the scale of operations of business, and the environment with which the business had to deal, also expanded. As a result, the need for more relevant, accurate and more reliable information increased, which ultimately gave rise to the special branches of accounting.<\/p>\r\n \r\n\r\nAccounting is divided into different branches:<\/strong>\r\n\r\n \r\n\r\n1.\u00a0\u00a0\u00a0\u00a0\u00a0 Financial Accounting\r\n\r\n2.\u00a0\u00a0\u00a0\u00a0\u00a0 Cost Accounting\r\n\r\n3.\u00a0\u00a0\u00a0\u00a0\u00a0 Management Accounting\r\n\r\n<\/div>\r\n

\r\n\r\n1.\u00a0\u00a0\u00a0\u00a0\u00a0 <\/strong>FINANCIAL ACCOUNTING<\/strong>\r\n\r\n\u00a0<\/strong>\r\n

This branch of accounting is concerned with keeping a record of all the financial transactions of the business and finding out the profit earned and loss incurred, during an accounting year, and also depicting the profitability as well as the financial position of the business.<\/p>\r\n\u00a0<\/strong>\r\n

The main statements under financial accounting are the Income and Expenditure Statement (which includes all the revenue transactions, and judges the profitability) and Balance Sheet (prepared to know the financial position).<\/p>\r\n\u00a0<\/strong>\r\n\r\nFinancial accounting discloses:<\/strong>\r\n\r\n\u00a0<\/strong>\r\n\r\n\u25aaThe profit and loss earned by the business \u25aaThe financial position of the business\r\n\r\n\u25aaThe financial information required by the management\r\n\r\n \r\n

Financial accounting is not free from any limitations. It is because of the following limitations that the cost accounting and management accounting arose.<\/p>\r\n \r\n

1.\u00a0\u00a0\u00a0\u00a0\u00a0 Controlling the costs is not possible in case of financial accounting, as the costs are determined only at the end of accounting year. And nothing can be done to control the costs after their determination at the end of the year.<\/p>\r\n

2.\u00a0\u00a0\u00a0\u00a0\u00a0 It records only the quantitative information. If an item cannot be measured in terms of money, it will not form a part of the accounts, even though it is important to the business.<\/p>\r\n

3.\u00a0\u00a0\u00a0\u00a0\u00a0 Financial accounting is historical in nature and records the transactions that had taken place during the year and does not records what will happen in the near future. It does not provide information on what should be done to improve the efficiency of the business.<\/p>\r\n

4.\u00a0\u00a0\u00a0\u00a0\u00a0 Final accounts may be manipulated according to the requirements of the concern. It may result into overstating or understating the accounts. Increase in profits, may be faked to attract more investors to the business, despite of their good dividend paying capacity. And as a result, the overall reliability of the accounts will deteriorate.<\/p>\r\n \r\n\r\n2.\u00a0\u00a0\u00a0\u00a0\u00a0 <\/strong>COST ACCOUNTING<\/strong>\r\n\r\n\u00a0<\/strong>\r\n

Business enterprise works to earn maximum possible profits, at the least possible cost. Incurring minimum costs in the aim of every enterprise, and they work to control the costs and this necessitated the emergence of cost accounting as one of the special branch of accounting. This branch of accounting has been developed due to the limitations of the financial accounting. And aims to analyse the expenditure\/cost incurred in every activity and therefore makes efforts to control the costs. It should be noted that Cost means Expenditure incurred, and not the Price of the Product.<\/p>\r\n\u00a0<\/strong>\r\n

The costing terminology of I.C.M.A, London defines cost accounting as \u201cthe process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centres and cost units. In its widest usage, it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of activities carried out or planned.\u201d<\/p>\r\n\u00a0<\/strong>\r\n

Cost accounting basically deals with the analysis and determination of costs well in advance, presentation of costs for controlling them and finally making decisions. It acts as an aid to the management in fixing prices, framing future production policies, providing cost data for making different period comparison etc.<\/p>\r\n\u00a0<\/strong>\r\n\r\nIt is also affected by few limitations:\r\n\r\n<\/div>\r\n

\r\n

\u00a0 \u00a0 1.\u00a0\u00a0\u00a0\u00a0\u00a0 There is a chance of subjectivity creeping in, in terms of valuation of closing stock, depreciation etc.<\/p>\r\n

2.\u00a0\u00a0\u00a0\u00a0\u00a0 All the items of expenses and incomes are not taken into consideration, basically the items of pure financial nature.<\/p>\r\n

3.\u00a0\u00a0\u00a0\u00a0\u00a0 It often fails to meet the informational need which is essential for various managerial functions.<\/p>\r\n

It is because of these limitations that the concept of management accounting arose, and came into use.<\/p>\r\n \r\n\r\n3.\u00a0\u00a0\u00a0\u00a0\u00a0 <\/strong>MANAGEMENT ACCOUNTING<\/strong>\r\n\r\n\u00a0<\/strong>\r\n

Although cost accounting provides information to the management regarding the costs involved and suggests measures to reduce the costs to the lowest, but still it lacks certain points as discussed above, which led to the emergence of management accounting. The information regarding the socio-economical issues and the statistical data is far beyond the scope of financial and cost accounting, therefore it paved the way towards management accounting.<\/p>\r\n\u00a0<\/strong>\r\n

Management accounting means the system of presenting the accounting information in such a way, so as to help the management in framing the policies, controlling, and carrying out the day to day functions more effectively and ultimately achieving the organisational goals.<\/p>\r\n\u00a0<\/strong>\r\n

According to the Anglo-American Council on Productivity, \u201cManagement Accounting is the presentation of accounting information in such a ways as to assist management in the creation of policy and the day to day operation of an undertaking.\u201d<\/p>\r\n\u00a0<\/strong>\r\n\r\nManagement accounting is not only limited to cost accounting but covers other areas as well. The scope of management accounting is wide spread, and relates to a number of fields such as:\r\n\r\n\u00a0<\/strong>\r\n\r\n1.\u00a0\u00a0\u00a0\u00a0\u00a0 Budgeting and Forecasting\r\n\r\n2.\u00a0\u00a0\u00a0\u00a0\u00a0 Inventory Control\r\n\r\n3.\u00a0\u00a0\u00a0\u00a0\u00a0 Internal Audit\r\n\r\n4.\u00a0\u00a0\u00a0\u00a0\u00a0 Reporting to Management\r\n\r\n \r\n\r\n1.\u00a0\u00a0\u00a0\u00a0\u00a0 Increase in Efficiency\r\n\r\n2.\u00a0\u00a0\u00a0\u00a0\u00a0 Effective managerial control\r\n\r\n3.\u00a0\u00a0\u00a0\u00a0\u00a0 Increase in profitability\r\n\r\n4.\u00a0\u00a0\u00a0\u00a0\u00a0 Rational decision making\r\n\r\n \r\n\r\nQUICK REVISION:<\/strong>\r\n\r\n \r\n

\u25aa\u00a0\u00a0\u00a0 Accounting is the art and science of communicating the reliable, accurate, understandable information to the management and other users for the purpose of making decisions.<\/p>\r\n\u25aa\u00a0 Accounting is divided into three branches: financial, cost and management accounting.\r\n

\u25aa\u00a0\u00a0 Financial Accounting is concerned with keeping a record of all the financial transactions of the business and finding out the profit earned and loss incurred, during an accounting year.<\/p>\r\n

\u25aa\u00a0\u00a0 Cost Accounting aims to analyse the expenditure\/cost incurred in every activity and therefore makes efforts to control the costs.<\/p>\r\n

\u25aa\u00a0\u00a0 Management Accounting means the system of presenting the accounting information in such a way, so as to help the management in framing the policies, controlling, and carrying out the day to day functions more effectively and ultimately achieving the organisational goals.<\/p>\r\n\r\n<\/div>\r\n \r\n

\r\n\r\nBASIS OF ACCOUNTING:<\/strong>\r\n\r\n \r\n

For the purpose of recording the transactions, there are three approaches which can be used by the accountants, and are accepted worldwide:<\/p>\r\n \r\n

1)\u00a0\u00a0\u00a0\u00a0\u00a0 <\/strong>Cash Basis: <\/strong>the actual cash receipts and actual cash payments are recorded under the cash basis of accounting. Transactions on credit are not taken into consideration, and not recorded in the books, till the cash is actually received or paid. For Example: the Receipts and Payment Account prepared by the Non- Profitable Institutes (schools, hospitals, charitable houses etc).<\/p>\r\n\u00a0<\/strong>\r\n\r\nAdvantages:\r\n\r\n\u00a0<\/strong>\r\n\r\n\u25aa\u00a0 is realistic in nature.\r\n\r\n\u25aa\u00a0 is simple to use and verifiable.\r\n\r\n \r\n\r\nDemerits:\r\n\r\n \r\n\r\n\u25aa\u00a0 does not depict the true profit and loss of the enterprise.\r\n\r\n\u25aa\u00a0 does not follow the matching principle of accounting.\r\n\r\n\u25aa\u00a0 ignores the credit transactions, hence incomplete results.\r\n\r\n \r\n

2)\u00a0\u00a0\u00a0\u00a0\u00a0 <\/strong>Accrual Basis: <\/strong>the drawbacks of cash basis of accounting paved the way for the development of accrual basis by the accountants. Under this system the costs and revenue are recognised in the same accounting year in which they occur, rather than when they are actually paid. This does not violate the matching concept of accounting. For example: the raw materials consumed are matched against the cost of goods sold.<\/p>\r\n\u00a0<\/strong>\r\n\r\nAdvantages:\r\n\r\n\u00a0<\/strong>\r\n\r\n\u25aa\u00a0 is more scientific as compared to the cash basis of accounting.\r\n\r\n\u25aa\u00a0 gives a complete picture of the financial transactions of the business.\r\n\r\n\u25aa\u00a0 does not violates the matching concept of accounting.\r\n\r\n \r\n\r\nDemerits:\r\n\r\n \r\n\r\n\u25aa\u00a0 is not as simple as cash basis.\r\n

\u25aa\u00a0 net profit or loss cannot be reached at quickly, as lots of adjustments are required.<\/p>\r\n \r\n

3)\u00a0\u00a0\u00a0\u00a0\u00a0 <\/strong>Hybrid\/ Mixed Basis: <\/strong>the accountant tried to club in both the basis of accounting and come up with one, where the advantages of both the basis are used up. Under hybrid system, Incomes are recorded on cash basis, whereas expenses are taken on accrual basis of accounting.<\/p>\r\n \r\n\r\nADVANTAGES OF ACOUNTING:<\/strong>\r\n\r\n \r\n

Accounting is the language of the business, it means it acts as a means of communication with the outside world and discloses the financial activities to the users. The accounting information so presented serves various benefits to the organisation:<\/p>\r\n\r\n<\/div>\r\n

\r\n

\u00a0 \u00a0 \u00a01)\u00a0\u00a0\u00a0\u00a0\u00a0 Acts as a memory replacement: accounting information is a replacement of the human memory, as it is quite difficult to remember each and every transaction by the businessman, therefore accounting has served as a replacement to the human memory.<\/p>\r\n

2)\u00a0\u00a0\u00a0\u00a0\u00a0 Comparative Study: accounting helps the owners to judge the profits, sales, expenses of the company in one accounting year, as compared to that of the previous year. And also, helps in finding any kind of differences or changes between the two period figures.<\/p>\r\n

3)\u00a0\u00a0\u00a0\u00a0\u00a0 Provides assistance to different parties: accounting information provides the information to different classes of users and helps them in taking the decisions concerning the business affairs.<\/p>\r\n

4)\u00a0\u00a0\u00a0\u00a0\u00a0 Complete Record: accounting is a process of recording, classifying, summarising and communicating the business transactions to the interested users, who are directly or indirectly related to the business. Therefore accounting provides a complete set\/ record of the business transactions in a systematic manner.<\/p>\r\n

5)\u00a0\u00a0\u00a0\u00a0\u00a0 Supplying information about financial activities: accounting provides information about the financial activities i.e. the profits earned and losses incurred are disclosed by the accounting information. Moreover, the basic function of accounting is also to reveal the financial activities to the owners and managers of the business.<\/p>\r\n

6)\u00a0\u00a0\u00a0\u00a0\u00a0 Complying legal formalities: tax assessment is made easy with the help of accounting information, means accounting information helps the owners of the business in deciding the amount of taxes to be paid and also helps in fulfilling other formalities of income tax and sales tax returns.<\/p>\r\n

7)\u00a0\u00a0\u00a0\u00a0\u00a0 Evidence in Court: if the accounts are maintained properly, they will act as proper evidence in the court, in case of any disputes. It is because the transactions when recorded, are entered in with proper proof and in a systematic order.<\/p>\r\n \r\n\r\nUSES OF ACCOUNTING INFORMATION:<\/strong>\r\n\r\n \r\n

Accounting information is presented by the accountants, so that it is used by different users. It is utilised by the interested parties, who are directly or indirectly related to the business, for their own benefit respectively. The way how different parties utilise the accounting information is stated below:<\/p>\r\n \r\n

1)\u00a0 Owners: owners use up the accounting information to judge the financial position of its concern, and find out if profits were earned or losses were incurred in the previous year. Owners need information for the study of past performance and considering the future prospects.<\/p>\r\n

2)\u00a0 Investors: before putting their money in the business, investors access the financial efficiency, profit earning capacity, dividend paying capacity and solvency of the firm. The investors are interested to know that whether the firm is growing steadily, and whether the value of its shares is increasing.<\/p>\r\n

3)\u00a0 \u00a0Government: government utilises the accounting information for studying the performance of a particular unit, income, and expenditure in order to impose tax and excise duty on the company.<\/p>\r\n

4)\u00a0 \u00a0Creditors\/ Suppliers: banks, suppliers and financial institutions use accounting information to judge the credit paying capacity of the enterprise, interest paying capacity. By judging so, they are able to actually decide whether to grant loans\/ credit to the institute.<\/p>\r\n

5)\u00a0 \u00a0Managers: the managers of the enterprise use accounting information to plan, control, evaluate the performance and for decision making regarding the affairs of business.<\/span><\/p>\r\n

6)\u00a0\u00a0\u00a0\u00a0\u00a0 Employees: employees are the assets of an organisation, they are concerned with the profits of the business because they are paid salaries, bonus etc from the profits. And the profits of the organisation are judged from the accounting information.<\/span><\/p>\r\n

7)\u00a0\u00a0\u00a0\u00a0\u00a0 Research Scholars: students involved in the research work, often use up the published accounting information for the purpose of analysing the financial position and hence proving their thesis.<\/span><\/p>\r\n\r\n<\/div>\r\n

\r\n\r\n \r\n\r\nQUICK REVISION:<\/strong>\r\n\r\n \r\n\r\n\u25aa\u00a0 The accounting transactions can either be recorded on cash basis, accrual basis or hybrid basis.\r\n\r\n\u25aa\u00a0 Accounting acts as a replacement to the human memory.\r\n\r\n\u25aa\u00a0 Accounting maintains a complete record of the financial affairs of the company.\r\n\r\n\u25aa\u00a0 It serves as evidence in the court and helps in complying with the legal formalities.\r\n\r\n\u25aa\u00a0 Accounting information is utilised by the owners, employees, managers, investors, creditors and government for different purposes.\r\n\r\n \r\n\r\nLIMITATIONS OF ACCOUNTING:<\/strong>\r\n\r\n \r\n\r\nFollowing are some of the limitations affecting accounting:\r\n\r\n \r\n

1) Only monetary transactions are recorded: accounting records only the transactions that are capable of being presented in terms of money, and does not include the events of non monetary nature, even though it is of great importance to the business. Example: Strikes by the labour, efficiency of the R&D department.<\/p>\r\n

2)Personal biasness involved: accountants are involved in the process of recording the accounting information, it may be affected by his personal biasness, such as, he may select any way of depreciating the machinery, valuing the stock and treating deferred revenue expenditure. The judgement of accountant will definitely affect the preparation and presentation of accounting information.<\/p>\r\n

3)\u00a0 Historical in Nature: the information supplied is on the basis of the already prepared Profit and Loss account and Balance Sheet. This means that only the information about already happened events is disclosed and no information about future is presented. Hence, accounting is historic in nature.<\/p>\r\n

4)\u00a0 Allows different treatments: Accounting allows different treatments within Generally Accepted Accounting Concepts (GAAP). An accountant for example, can either use the LIFO (last in first out) method or FIFO (first in first out) method in order to value the closing stock. Applying different methods might lead to different results and as a result the comparable quality of information might get lost.<\/p>\r\n

5)\u00a0 \u00a0 \u00a0Changes in price are not considered: accounting transactions are recorded in the books of accounts at cost basis, whereas the effect of changes in price level is not considered and not recorded in the books. As a result comparing the data of various years becomes quite difficult.<\/p>\r\n\r\n<\/div>\r\n \r\n\r\nQUICK REVISION:<\/strong>\r\n