Financial Accounting Concepts

What are the Various Subfields of Accounting?

Accounting extends far beyond the preparation of financial statements. At its core, it embodies a systematic approach to capturing, recording and analyzing financial information to facilitate informed decision-making by various stakeholders. This core function branches out into several specialized areas, each addressing specific needs and offering distinct career paths.

To understand the meaning of accounting and how the different subfields of accounting fit together, it is essential to know what they are.

The various subfields of accounting are given below:

Financial Accounting

Financial accounting is the measurement, recording and reporting of an organization’s financial activity. The scope of financial accounting covers the preparation and interpretation of financial statements and communication to the users of the accounts.

Financial accounting usually consists of preparing financial statements (balance sheets, income statements, cash flow statements), following Generally Accepted Accounting Principles (GAAP), and ensuring compliance with financial reporting regulations.

The primary purpose of financial accounting is to report and evaluate an organization’s financial activities. The second purpose is to present a reliable picture of the organization’s performance and to help manage the organization’s resources efficiently and effectively.

Financial Accounting is historical because it records transactions that have already occurred in the past. The last step of financial accounting is preparing and presenting Profit and Loss A/c and Balance Sheet. It primarily helps determine the net result of an accounting period and the financial position on a given date.

Management Accounting

Management accounting is the practice of providing data that helps senior management assess the performance of their managers and competent people within a department or company. The data is used to determine and communicate key performance indicators (KPIs) and the effectiveness of individual managers and departments.

Management Accounting is concerned with internal reporting to the managers of a business enterprise. To discharge the functions of stewardship, planning, control and decision-making, the management needs a variety of information.

The different methods of grouping information are preparing reports as desired by the managers for discharging their attest functions are referred to as management accounting. An essential component of management accounting is cost accounting, which deals with ascertaining cost and control.

Cost Accounting

As the name implies, it is the accounting of costs, which is not the same as the accounting of expenses. These costs, which are incurred for production, cannot be charged against the profit, but the revenues. When the total costs are included in the income statement, the company shows an increase in income compared to expenses.

The terminology of cost accounting published by the Institute of Cost and Management Accountants of England and Wales defines cost accounting as:

“the process of accounting for cost begins with the recording  of income and expenditure or the base on which they are calculated and ends with the preparation of periodical statements and reports for ascertaining and controlling costs.”

Cost accounting is an integral part of any business. It helps companies manage and report their expenses to stakeholders. In this process, a business must first understand how it allocates costs throughout the various stages of its business. Costs usually cover all of the fixed expenses like rent, utilities, equipment, raw materials, supplies, and employees. Other costs may include marketing, sales and management fees. Some companies also include production overhead such as research, development, administration and legal costs.

Cost accounting then ensures accurate tracking and management of all costs incurred throughout all the operational phases of a company. It also helps prepare a well-organized and accurate financial report to support future activities. It allows a company to monitor their cost of operations. Cost accounting is mainly used to analyse and control fixed expenses. These expenses usually don’t fluctuate much and this is why most businesses use it to analyse their costs. Most cost accounting methods are based on the idea of ‘cost of sales’, ‘cost of service’ and ‘cost of goods sold’.

The significance of cost accounting cannot be overstated in the modern business climate. It aids in ensuring that company decisions are founded on facts rather than assumptions. The primary purpose of cost accounting is to ensure that a business makes sound and timely financial and other decisions. Thus, it is a vital activity in the existence of any organisation. This article will describe the essential principles and operation of cost accounting.

Human Resource Accounting 

Human Resource Accounting (HRAC) is the process of accounting for all available information related to the employees of an organization, their salaries, titles, positions, job descriptions and duties. HRAC also includes payroll processing and benefits administration. This term is often used by human resources professionals interested in learning more about how financial statements can be used to measure the performance of human resources functions.

HR accounting is an attempt to identify, quantify and report the investments made in the human resources of a business organization. As modern accounting is based on the Money Measurement Concept, human resources is not presently accounted for. Hence HR accounting is essential to quantify the contribution of human resources.

The aim of human resource accounting is to study the performance of the human resource in the organization. The performance of the human resources of an organization is measured in terms of profit and loss. The profitability of an organization is directly related to the cost of the resource to the organization, and the return on the cost of the resource.

Social Responsibility Accounting 

Social Responsibility Accounting is a concept in which the stakeholders hold firms accountable in terms of environmental and social factors. Social responsibility accounting is a way to hold firms responsible for their activities to satisfy stakeholders. It also means that firms must pay the cost associated with these externalities when there are externalities. This accounting helps companies differentiate themselves from competitors in an increasingly competitive environment.

The purpose of Social Responsibility Accounting is to provide a transparent view of the social and environmental cost or benefit created by the organization. This helps stakeholders, such as investors, customers, employees, and communities, make informed decisions based on the organization’s impact on society.

The demand for social responsibility accounting stems from increasing social awareness about the undesirable by-products of economic activities. Social responsibility accounting is concerned with accounting for social costs incurred by the enterprise and the social benefit created.

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