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1. A REPORT ON:
Branches of Accounting
1

2. Prepared By:
Name: ID
1. S.M.Al-Rafi 2014210000154
Prepared For:
Sharmin Akter
Lecturer
School of Business Studies
Southeast University
Banani, Dhaka 1213
Bangladesh
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3. Letter of Transmittal
22th
April, 2012
Sharmin Akter
Lecturer
School of Business Studies
Southeast University
Banani, Dhaka 1213
Bangladesh
Subject: Letter of transmittal
Dear Madam,
It is a great pleasure for us that we have the opportunity to submit the report on “Branches of
accounting”. I have tried our level best to put meticulous effort for the preparation of this report.
Any shortcomings or fault may arise as my unintentional mistake. I shall wholeheartedly
welcome any clarification and suggestion about any view and conception disseminated through
this report.
Thanking you
Sincerely yours,
1. S.M.Al-Rafi
(2014210000154)
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4. Acknowledgement
This report has been created with excitement & joy by group members. At first I want to give
thanks to our respected teacher “SHARMIN AKTER” for her crucial support. I also want to give
thanks to our family, friends & others course mate. Internet is another important source of
collecting data.
4

5. Content
Topic Page
Part-1 Accounting Basic: Introduction 6
Brief history of Accounting 7
The Basics 10
The Accounting Process 13
Part-2 The Accounting discipline 15
Part-3 Branches of accounting: 16
Financial accounting 17
Auditing 21
Tax accounting 26
Managerial accounting 32
Cost accounting 36
Fund accounting 42
Governmental accounting 47
Part-4 Conclusion 51
Part-5 Reference 52
Accounting Basics: Introduction
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6. Accounting is an ancient art as old as money itself. Luca Pacioli is widely regarded as “Father of
Accounting”. He developed the double entry bookkeeping system. Double-entry is defined as
any bookkeeping system in which there is a debit and credit entry for each transaction, or for
which the majority of transactions are intended to be of this form.
The systematic and comprehensive recording of financial transactions pertaining to a business.
Accounting also refers to the process of summarizing, analyzing and reporting these transactions.
The financial statements that summarize a large company's operations, financial position and
cash flows over a particular period are a concise summary of hundreds of thousands of financial
transactions it may have entered into over this period. Accounting is one of the key functions for
almost any business.
The reports generated by various streams of accounting, such as cost accounting and
management accounting, are invaluable in helping management make informed decisions. While
basic accounting functions can be handled by a bookkeeper, advanced accounting is handled by
qualified accountants who possess designations such as CPA (Certified Public Accountant) in the
United States, or CA (Chartered Accountant)/CGA (Certified General Accountant)/CMA
(Certified Management Accountant) in Canada. All accounting designations are the culmination
of years of study and rigorous examinations, combined with a minimum number of years of
practical accounting experience.
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7. Brief history of Accounting
1904, 50 years after the emergence of the formal profession, about 6,000 practitioners carried the
title of chartered accountant. In 1957, there were38, 690 chartered and incorporated
accountants (Scottish, British and Irish). Today, the Institute of Chartered Accountants in
England and Wales alone has a membership of over 120,000 worldwide. This is to say nothing of
the many professionals in the other allied institutes along with certified public accountants
comprising vast, worldwide network of profession.
Double entry bookkeeping developed in 14th century Italy instead of ancient Greece or
Rome, accounting scholar A.C. Littleton describes seven "key ingredients" which led to its
creation: Private property ,Capital, Commerce, Credit, Writing ,Money, Arithmetic. The
problems encountered by the ancients with record keeping, control and verification of financial
transactions were not entirely different from our current ones. Governments, in particular, had
strong incentives to keep careful records of receipts and disbursements – particularly concerning
taxes.
The Mesopotamian equivalent of today's accountant was the scribe. His duties were similar, but
even more extensive. In addition to writing up the transaction, he ensured that the agreements
complied with the detailed code requirements for commercial transactions. Temples, palaces and
private firms employed hundreds of scribes, and it was considered a prestigious profession.
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8. The Christian China used accounting chiefly as a means of evaluating the efficiency of
governmental programs and the civil servants who administered them. A level of sophistication
was achieved during the Chao Dynasty (1122 - 256 B.C.), which was not surpassed in China
until after the introduction of double entry processes in the 19 century.
At the turn of the century, there were at least four types of funds statements in use
those that summarized changes in cash, in current assets, in working capital and overall
financial activities.
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9. Why is accounting important to understand?
Accounting is the most important part of any successful business. It records all profits, losses,
credits, and debits. It tells you the state of the business in numbers, not words. It provides the
most vital information you need to understand how your business grows, makes money, where
the profit of a business goes, and what your cash flow is. In short, if you do not understand the
basic principles of accounting, you cannot run a business, nor can you even hope to help a
business grow and profit.
If you work for a company and are currently managing any aspect of the company, or if you
aspire to move up to management, then you need to understand what accounting is. Moreover, if
you are an entrepreneur, or you ever plan to start your own business, you need to understand, at
the very least, the basic principles of accounting.
The three main financial reports of a company: the balance sheet, the income statement, and the
cash flow statement. You'll know and understand the basic accounting equation and how to
factor in debits, credits, inventory, and taxes, which will help you to make the right decisions to
increase your company's wealth and profit.
Learning accounting is like any new skill. There is a learning curve, and the skill needs to be
practiced (or used in this case) in order for it to be effective. If you have access to your
company's financial statements, please take the time to apply our examples to your company's
financials. If you are an entrepreneur, a business owner, or plan to start your own business, copy
our examples used in this course, using your own business relevant assets.
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10. Accounting Basics: The Basics
The Difference Between Accounting and Bookkeeping
Bookkeeping is an unglamorous but essential part of accounting. It is the recording of all the
economic activity of an organization - sales made, bills paid, capital received - as individual
transactions and summarizing them periodically (annually, quarterly, even daily). Except in the
smallest organizations, these transactions are now recorded electronically; but before computers
they were recorded in actual books, thus bookkeeping.
The accountants design the accounting systems the bookkeepers use. They establish the internal
controls to protect resources, apply the principles of standards-setting organizations to the
accounting records and prepare the financial statements, management reports and tax returns
based on that data. The auditors that verify the accounting records and express an opinion on
financial statements are also accountants, as are management, tax and forensic accounting
specialists.
Double-Entry Bookkeeping
The economic events of a business are recorded as transactions and applied to the accounts
(hence accounting). For example, the cash account tracks the amount of cash on hand; the sales
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11. account records sales made. The chart of accounts of even small companies has hundreds of
accounts; large companies have thousands.
The transactions are posted in journals, which were (and for some small organizations, still are)
actual books; nowadays, of course, the journals are typically part of the accounting software.
Each transaction includes the date, the amount and a description.
For example:
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12. Debits and Credits
We're accustomed to thinking of a "credit" as something "good" - our account is credited when
we get a refund; you get "extra credit" for being polite. Meanwhile, a "debit" is something
negative - a debit reduces our bank balance; it's used to mean shortcoming or disadvantage.
In accounting, debit means one thing: left-hand side. Credit means one thing: right-hand side.
When you receive cash - a "good" thing - you increase the Cash account by debiting it. When
you use cash - a "bad" thing - you decrease Cash by crediting it. On the other hand, when you
make a sale, which is nice, you credit the Sales account; when someone returns what you sold,
which is not nice, you debit sales.
"Good" and "bad" have nothing to do with debit and credit.
Debit = Left; Credit = Right. That's it. Period.
Accrual vs. Cash Basis Accounting
Although cash basis statements are simpler and make good sense for many individual taxpayers
and small businesses, it results in misleading financial statements. Consider a Halloween
costume maker: it conceives, produces and sells costumes throughout the year, but gets paid for
its costumes mostly in October. If sales were recognized only when cash was received, October
would show an enormous profit while all other months would show losses. Accrual accounting
seeks to match the revenues earned during a period with the expenses incurred to generate them,
regardless of when cash comes in or goes out.
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13. Accounting Basics: The Accounting Process
As implied earlier, today's electronic accounting systems tend to obscure the traditional forms of
the accounting cycle. Nevertheless, the same basic process that bookkeepers and accountants
used to perform by hand are present in today's accounting software. Here are the steps in the
accountingcyle:
(1) Identify the transaction from source documents, like purchase orders, loan agreements,
invoices, etc.
(2) Record the transaction as a journal entry (see the Double-Entry Bookkeeping Section above).
(3) Post the entry in the individual accounts in ledgers. Traditionally, the accounts have been
represented as Ts, or so-called T-accounts, with debits on the left and credits on the right.
(4) At the end of the reporting period (usually the end of the month), create a preliminary trial
balance of all the accounts by (a) netting all the debits and credits in each account to calculate
their balances and (b) totaling all the left-side (i.e, debit) balances and right-side (i.e., credit)
balances. The two columns should be equal.
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14. (5) Make additional adjusting entries that are not generated through specific source documents.
For example, depreciation expense is periodically recorded for items like equipment to account
for the use of the asset and the loss of its value over time.
(6) Create an adjusted trial balance of the accounts. Once again, the left-side and right-side
entries - i.e. debits and credits - must total to the same amount
(7) Combine the sums in the various accounts and present them in financial statements created
for both internal and external use.
(8) Close the books for the current month by recording the necessary reversing entries to start
fresh in the new period (usually the next month).
Nearly all companies create end-of-year financial reports, and a new set of books is begun each
year. Depending on the nature of the company and its size, financial reports can be prepared at
much more frequent (even daily) intervals. The SEC requires public companies to file financial
reports on both a quarterly and yearly equal.
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15. THE ACCOUNTING DISCIPLINE
Accounting is made up of several specialty areas that might be defined in a variety of ways.
Generally, there are three broad areas of accounting that include public accounting,
governmental accounting and management accounting. These specialty areas are illustrated in
Exhibit 1-1 and discussed individually below.
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16. Branches of Accounting:
Different branches of accounting came into existence keeping in view various types of
accounting information needed by different class of people viz. owners, shareholders,
management, suppliers, creditors, taxation authorities and various government agencies, etc.
There are three main branches of accounting which include financial accounting, cost accounting
and management accounting. Accounting can be divided into several areas of activity. These can
certainly overlap and they are often closely intertwined. But it's still useful to distinguish them,
not least because accounting professionals tend to organize themselves around these various
specialties.
Some of branches that I am explaining in this report are given below:
1. FINANCIAL ACCOUNTING
2. AUDITING
3. TAX ACCOUNTING
4. MANAGERIAL ACCOUNTING
5. COST ACCOUNTING
6. FUND ACCOUNTING
7. GOVERNMENTAL ACCOUNTING
Financial Accounting
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17. Financial accounting is a specialized branch of accounting that keeps track of a company's
financial transactions. Using standardized guidelines, the transactions are recorded, summarized,
and presented in a financial report or financial statement such as an income statement or a
balance sheet.
Companies issue financial statements on a routine schedule. The statements are considered
external because they are given to people outside of the company, with the primary recipients
being owners/stockholders, as well as certain lenders. If a corporation's stock is publicly traded,
however, its financial statements (and other financial reporting’s) tend to be widely circulated,
and information will likely reach secondary recipients such as competitors, customers,
employees, labor organizations, and investment analysts.
It's important to point out that the purpose of financial accounting is not to report the value of a
company. Rather, its purpose is to provide enough information for others to assess the value of a
company for themselves.
Because external financial statements are used by a variety of people in a variety of ways,
financial accounting has common rules known as accounting standards and as generally accepted
accounting principles (GAAP). In the U.S., the Financial Accounting Standards Board (FASB) is
the organization that develops the accounting standards and principles. Corporations whose stock
is publicly traded must also comply with the reporting requirements of the Securities and
Exchange Commission (SEC), an agency of the U.S. government.
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18. Survey of Financial Restatements by Public Companies in 2013:
Financial Reporting
Financial reporting is a broader concept than financial statements. In addition to the financial
statements, financial reporting includes the company's annual report to stockholders, its annual
report to the Securities and Exchange Commission (Form 10-K), its proxy statement, and other
financial information reported by the company.
Financial Statements
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19. Financial accounting generates the following general-purpose, external, financial statements:
Income Statement
The income statement reports a company's profitability during a specified period of time. The
period of time could be one year, one month, three months, 13 weeks, or any other time interval
chosen by the company.
The main components of the income statement are revenues, expenses, gains, and losses.
Revenues include such things as sales, service revenues, and interest revenue. Expenses include
the cost of goods sold, operating expenses (such as salaries, rent, utilities, advertising), and no
operating expenses (such as interest expense).
Balance Sheet
The balance sheet is organized into three parts: (1) assets, (2) liabilities, and (3) stockholders'
equity at a specified date (typically, this date is the last day of an accounting period).
The first section of the balance sheet reports the company's assets and includes such things as
cash, accounts receivable, inventory, prepaid insurance, buildings, and equipment. The next
section reports the company's liabilities; these are obligations that are due at the date of the
balance sheet and often include the word "payable" in their title (Notes Payable, Accounts
Payable, Wages Payable, and Interest Payable). The final section is stockholders' equity, defined
as the difference between the amount of assets and the amount of liabilities.
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20. Statement of Cash Flows
The statement of cash flows explains the change in a company's cash (and cash equivalents)
during the time interval indicated in the heading of the statement. The change is divided into
three parts: (1) operating activities, (2) investing activities, and (3) financing activities.
The operating activities section explains how a company's cash (and cash equivalents) have
changed due to operations. Investing activities refer to amounts spent or received in transactions
involving long-term assets. The financing activities section reports such things as cash received
through the issuance of long-term debt, the issuance of stock, or money spent to retire long-term
liabilities.
Statement of Stockholders' Equity
The statement of stockholders' (or shareholders') equity lists the changes in stockholders' equity
for the same period as the income statement and the cash flow statement. The changes will
include items such as net income, other comprehensive income, dividends, the repurchase of
common stock, and the exercise of stock options.
Auditing
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21. A systematic process of (1) objectively obtaining and evaluating evidence regarding assertions
about economic actions and events to ascertain the degree of correspondence between those
assertions and established criteria and (2) communicating the results to interested users.
An auditor's job is to ensure the integrity of financial data. When performing an audit, an auditor
will request access to the business' financial records. This includes the ledgers, lists of receipts
and expenditures, bank balances, records of physical assets owned or leased and many other
records. The auditor will also interview personnel and review the business' accounting system
and its internal controls. In essence, the auditor will review any activity that affects the business'
finances.
Audits exist because they add value through easing the cost of information asymmetry, not just
because they are required by law. For example, a privately-held company that does not issue
securities on a public exchange might engage a firm to audit its financial statements in order to
obtain more desirable loan terms from a financial institution. Without the audit, the lending party
would not have assurance as to whether or not the company's financial position is accurate. In
turn, the lender could price protect (raise their price) against this information asymmetry.
An auditor working for a private business may review a client's banking and other financial
statements, to verify that they have been correctly prepared and appropriately reported as
required by the law. Auditors must keep themselves educated of any changes in law that will
affect how their clients must report financial information. It is important that the auditor be able
to give an unbiased evaluation of a client's records.
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22. Auditors are not expected to guarantee that 100 percent of the transactions are recorded
correctly. They are only required to express an opinion as to whether the financial statements,
taken as a whole, give a fair representation of the organization's financial picture. In addition,
audits are not intended to discover embezzlements or other illegal acts. Therefore, a "clean" or
unqualified opinion should not be interpreted as an assurance that such problems do not exist.
Audit procedures
Identify the audit procedures
1.
Explanation
Choose the assertion that will be tested
Example of substantive Procedure
Choose an assertion from Completeness, Valuation and allocation, Rights and obligations and
Existence if you are testing the period-end balance of PPE; valuation of non-current assets is the
assertion tested.
2.
Explanation
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23. Identify the risk that will cause a material misstatement in the financial statements – the audit
risk is the total value of PPE that may be misstated due to over-valuation/ undervaluation of PPE
Example of substantive
Procedure
One risk relates to the revalued assets not representing fair values, thus under/overstating PPE
3.
Explanation
Think of the audit procedures that should be performed in order to avoid the risk mentioned .
Example of substantive
Procedure
The auditor will agree the availability of a revaluation report (a source document for the
revaluation) and confirm that the value mentioned in the valuation report matches the amount at
which the PPE is revalued and shown in the financial statements.
Furthermore, the auditor will recalculate the revaluation surplus in accordance with the
provisions of IAS 16, Property, Plant and Equipment to confirm the correctness of the
accounting entries relating to revaluation surplus. The amount added to revaluation surplus
should be the difference between the net book value of PPE and the revalued amounts. The
auditor should agree the assumptions used in the report for reasonableness.
Common errors in auditing
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24. The examiner’s reports mention various errors that candidates make while writing audit
procedures. Here is a summary of the common errors.
While writing audit procedures, avoid the following:
• Writing an audit procedure without explaining the reason for the procedure – for
example, ‘The auditor will check a sample of items from the inventory sheets to the
inventory.’
• Stating an assertion word as a reason for performing a procedure – for example,
‘confirming the occurrence of sales’.
• Writing what the internal control system should do rather than stating the audit
procedure – for example, ‘for all goods received, there should be a goods received note
raised’.
• Writing vague procedures – for example, ‘check the invoice’, ‘check the goods
received note’, etc. These procedures are inappropriate as they do not mention what is to
be checked and the reason for checking them.
• Quoting incorrect assertions – for example, ‘tracing details from the purchase orders to
the goods received notes in order to confirm existence of the goods’ – the completeness
assertion would apply here.
• Including procedures that cannot be carried out – for example, ‘agree individual
items of physical inventory to the sales invoice’. It will not be possible to agree the
physical goods to the sales invoice as the goods will already be sold.
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25. • Including procedures that are incorrect – for example, ‘agree details from the
purchase orders (like description of items ordered, quantities ordered) to the goods held
in the inventory store’. This is an incorrect audit procedure as goods received notes (not
purchase orders) are used to update inventory.
• Writing impractical procedures – for example, suggesting a segregation of duties
between the person authorizing petty cash vouchers, recording petty cash vouchers and
dispensing the petty cash.
• Writing irrelevant audit procedures – for example, when you are asked to write audit
procedures relating to depreciation of a non-current asset, it will be inappropriate to
provide general audit procedures relating to audit of non-current assets.
Tax Accounting
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26. Accounting methods that focus on taxes rather than the appearance of public financial
statements. Tax accounting is governed by the Internal Revenue Code which dictates the specific
rules that companies and individuals must follow when preparing their tax returns. Tax principles
often differ from Generally Accepted Accounting Principles.
Balance sheet items can be accounted for differently when preparing financial statements and tax
payables. For example, companies can prepare their financial statements implementing the first-
in-first-out (FIFO) method to record their inventory for financial purposes, yet they can
implement the last-in-first-out (LIFO) approach for tax purposes. The latter procedure reduces
the current year's taxes payable.
Today's business and tax environment is increasingly complex, there are more and more
demands for transparency, tax departments are under pressure to be more effective and highly
qualified professionals can be hard to obtain.
To help you respond to these demands, we provide assistance in three key areas:
Tax accounting: supporting quarterly and annual tax provision calculations, validating tax
balance sheet accounts and implementing new accounting standards under IFRS and/or local
GAAP
Tax function performance: improving operating strategy and organization design, tax process
and controls, and data and systems effectiveness
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27. Tax risk: identifying and prioritizing key risks and assisting with controls monitoring and
remediation.
The scope and nature of our services may differ depending on whether you are an auditor non-
audit client. What's consistent is the high-quality service our professionals provide to address
your unique needs, throughout the entire tax life cycle of planning, provision, compliance and
working with the tax authorities.
Temporary Differences in Tax Accounting
Temporary differences occur because financial accounting and tax accounting rules are
somewhat inconsistent when determining when to record some items of revenue and expense.
Two types of temporary differences exist. One results in a future taxable amount, such as
revenue earned for financial accounting purposes but deferred for tax accounting purposes. This
may happen if a company uses the cash method for tax preparation.
The second type of temporary difference is a future deductible amount. The company is
reporting an expense on the current tax return but reports it for financial statement purposes in
the future. Depreciation is a great example of this.
Because of this, accounting geeks also refer to temporary differences as timing differences.
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28.  Accrued liabilities. Liabilities are claims against a business, such as contingent liabilities,
which is money the company may have to pay out in the future based on events that haven’t yet
come to fruition. Under financial accounting, a business has to record liabilities when they’re
most probably incurred and the dollar amount can be reasonably estimated.
This rule ensures that the users of the financial statements have relevant information for
evaluating the merits of one company against another. Not properly booking accrued liabilities
usually understates expenses, which overstates net income. It’s also a pretty big deal when doing
ratio analysis.
For tax purposes, liabilities aren’t included until all events establishing and substantiating the
liability take place and the liability is reasonably estimated. An example is accruing wages
payable to officers of the corporation, which IRC specifically disallows. The company can’t
expense those outlandish bonuses until it cuts the checks!
 Depreciation. Most accounting books emphasize this example of a temporary difference: For
book purposes, the company may use straight-line depreciation, whereas for tax purposes, it may
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29. use a more accelerated method, such as IRC Section 179. Under certain circumstances, IRC
Section 179 allows a business to write off 100 percent of the cost of the asset in the first year of
use.
Financial depreciation methods, on the other hand, call for the asset to be expensed over both the
contemporaneous and future years.
To make this concept a little easier to understand, the figure shows the timing difference when
using financial versus tax depreciation methods. In this example, the company uses straight-line
depreciation for an asset costing $12,000 with no salvage value and a useful life of three years.
As you can see, the same $12,000 ends up on the income statement as a depreciation expense.
However, for tax purposes, it all gets expensed in year 1; for book purposes, it’s spread over
three years.
 Estimates. Estimates are any expenses for which the company figures a reasonable amount,
such as warranty costs, which is the cost to repair items sold to customers, or allowance for bad
debts, which is how much in accounts receivable the company reckons it won’t collect from
customers.
A company can’t deduct estimates as an expense on its tax return until it actually incurs the cost.
The IRC has strict criteria for deducting bad debts. For example, a bona fide creditor–debtor
relationship must exist, and the debt must be positively uncollectible (for example, the debtor
files for bankruptcy and the company is not a secured creditor).
Permanent Differences in Tax Accounting
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30. Five common permanent differences are penalties and fines, meals and entertainment, life
insurance proceeds, interest on municipal bonds, and the special dividends received deduction.
• Penalties and fines. These expenses occur when a business breaks civil, criminal, or
statutory law (and gets caught!). Say that a company breaks a local zoning ordinance or
an employee gets a speeding ticket while driving the company car to conduct company
business.
The company deducts any fines assessed against book income, but IRC 162(f) disallows a
penalty/fine expense for tax purposes. The company never gets to reduce taxable income
for the expense — thus a permanent difference between net and taxable income.
• Meals and entertainment. Companies can expense 100 percent of the cost to provide
business-related meals and entertainment that they incur in the normal course of business
for book purposes. However, under IRC 274(n), for tax purposes, the business can
expense, at most, only 50 percent of that same cost, unless certain exceptions apply. In
taxes, as in life, there’s no free lunch.
• Life insurance proceeds. If a corporation receives life insurance upon the death of an
employee, it’s income for financial accounting but never for taxable income. As for the
premiums paid for the life insurance on key employees, the company can expense them
for book but not tax purposes.
• Interest on municipal bonds. Municipal bonds are debt instruments a local government
issues to fund a project, such as a new highway. Under GAAP, you add this income to net
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31. income. For federal tax, it’s generally never taxed (although this may not be true in some
states). Likewise, any expenses incurred in obtaining tax-exempt income are deductible
for book but not tax purposes.
• Special dividend received deduction. Dividends a company receives from other
businesses in which they have ownership are taxable at less than 100 percent, depending
on the amount of ownership. For financial accounting purposes, you include all dividends
a company receives as income.
Managerial accounting
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32. According to the Institute of Management Accountants (IMA): "Management accounting is a
profession that involves partnering in management decision making, devising planning and
performance management systems, and providing expertise in financial reporting and control to
assist management in the formulation and implementation of an organization's strategy"
Practice:
The American Institute of Certified Public Accountants (AICPA) states that management
accounting as practice extends to the following three areas:
• Strategic management—advancing the role of the management accountant as a strategic
partner in the organization.
• Performance management—developing the practice of business decision-making and
managing the performance of the organization.
• Risk management—contributing to frameworks and practices for identifying, measuring,
managing and reporting risks to the achievement of the objectives of the organization.
Differences between financial accountancy and management accounting:
Management accounting information differs from financial accountancy information in several
ways:
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33. • while shareholders, creditors, and public regulators use publicly reported financial
accountancy information, only managers within the organization use the normally
confidential management accounting information;
• while financial accountancy information is historical, management accounting
information is primarily forward-looking;
• while financial accountancy information is case-based, management accounting
information is model-based with a degree of abstraction in order to support generic
decision making;
• While financial accountancy information is computed by reference to general financial
accounting standards, management accounting information is computed by reference to
the needs of managers, often using management information system.
Tasks/services provided:
Listed below are the primary tasks/services performed by management accountants. The degrees
of complexity relative to these activities are dependent on the experience level and abilities of
any one individual.
• Rate and volume analysis
• Business metrics development
• Price modeling
• Product profitability
• Geographic vs. industry or client segment reporting
• Sales management scorecards
• Cost analysis
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34. • Cost–benefit analysis
• Cost-volume-profit analysis
• Life cycle cost analysis
• Client profitability analysis
• IT cost transparency
• Capital budgeting
• Buy vs. lease analysis
• Strategic management advice
Role within a corporation:
Consistent with other roles in modern corporations, management accountants have a dual
reporting relationship. As a strategic partner and provider of decision based financial and
operational information, management accountants are responsible for managing the business
team and at the same time having to report relationships and responsibilities to the corporation's
finance organization.
The activities management accountants provide inclusive of forecasting and planning,
performing variance analysis, reviewing and monitoring costs inherent in the business are ones
that have dual accountability to both finance and the business team. A function of management
accounting in such organizations is to work closely with the IT department to provide. Given the
above, one view of the progression of the accounting and finance career path is that financial
accounting is a stepping stone to management accounting. Consistent with the notion of value
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35. creation, management accountants help drive the success of the business while strict financial
accounting is more of a compliance and historical endeavor.
Traditional vs. innovative practices:
The distinction between traditional and innovative accounting practices is perhaps best illustrated
with the visual timeline (see sidebar) of managerial costing approaches presented at the Institute
of Management Accountants 2011 Annual Conference.
Traditional standard costing (TSC), used in cost accounting, dates back to the 1920s and is a
central method in management accounting practiced today because it is used for financial
statement reporting for the valuation of income statement and balance sheet line items such as
cost of goods sold (COGS) and inventory valuation. Traditional standard costing must comply
with generally accepted accounting principles (GAAP US) and actually aligns itself more with
answering financial accounting requirements rather than providing solutions for management
accountants. Traditional approaches limit themselves by defining cost behavior only in terms of
production or sales volume.
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36. Cost accounting
Cost accounting is a process of collecting, analyzing, summarizing and evaluating various
alternative courses of action. Its goal is to advise the management on the most appropriate course
of action based on the cost efficiency and capability. Cost accounting provides the detailed cost
information that management needs to control current operations and plan for the future.
Origins:
Some costs tend to remain the same even during busy periods, unlike variable costs, which rise
and fall with volume of work. Over time, these "fixed costs" have become more important to
managers. Examples of fixed costs include the depreciation of plant and equipment, and the cost
of departments such as maintenance, tooling, production control, purchasing, quality control,
storage and handling, plant supervision and engineering.[2] In the early nineteenth century, these
costs were of little importance to most businesses. However, with the growth of railroads, steel
and large scale manufacturing, by the late nineteenth century these costs were often more
important than the variable cost of a product, and allocating them to a broad range of products
led to bad decision making. Managers must understand fixed costs in order to make decisions
about products and pricing.
For example: A company produced railway coaches and had only one product. To make each
coach, the company needed to purchase $60 of raw materials and components, and pay 6
laborers $40 each. Therefore, total variable cost for each coach was $300. Knowing that making
a coach required spending $300, managers knew they couldn't sell below that price without
losing money on each coach. Any price above $300 became a contribution to the fixed costs of
the company. If the fixed costs were, say, $1000 per month for rent, insurance and owner's
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37. salary, the company could therefore sell 5 coaches per month for a total of $3000 (priced at $600
each), or 10 coaches for a total of $4500 (priced at $450 each), and make a profit of $500 in both
cases.
Cost Accounting vs. Financial Accounting:
• Financial accounting aims at finding out results of accounting year in the form of Profit
and Loss Account and Balance Sheet. Cost Accounting aims at computing cost of
production/service in a scientific manner and facilitates cost control and cost reduction.
• Financial accounting reports the results and position of business to government, creditors,
investors, and external parties.
• Cost Accounting is an internal reporting system for an organization’s own management
for decision making.
• In financial accounting, cost classification based on type of transactions, e.g. salaries,
repairs, insurance, stores etc. In cost accounting, classification is basically on the basis of
functions, activities, products, process and on internal planning and control and
information needs of the organization.
• Financial accounting aims at presenting ‘true and fair’ view of transactions, profit and
loss for a period and Statement of financial position (Balance Sheet) on a given date. It
aims at computing ‘true and fair’ view of the cost of production/services offered by the
firm.
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38. Types of cost accounting:
The following are different cost accounting approaches:
1. Standard cost accounting
2. Lean accounting
3. Activity-based costing
4. Resource consumption accounting
5. Throughput accounting
6. Life cycle costing
7. Environmental accounting
8. Target costing
Classification of costs:
Classification of cost means, the grouping of costs according to their common characteristics.
The important ways of classification of costs are:
1. By Element: There are three elements of costing i.e. material, labor and expenses.
2. By Nature or Traceability: Direct Costs and Indirect Costs. Direct Costs are Directly
attributable/traceable to Cost Object. Direct costs are assigned to Cost Object. Indirect
Costs are not directly attributable/traceable to Cost Object. Indirect costs are allocated or
apportioned to cost objects.
3. By Functions: production, administration, selling and distribution, R&D.
4. By Behavior: fixed, variable, semi-variable. Costs are classified according to their
behavior in relation to change in relation to production volume within given period of
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39. time. Fixed Costs remain fixed irrespective of changes in the production volume in given
period of time. Variable costs change according to volume of production. Semi-variable
costs are partly fixed and partly variable.
5. By control ability: controllable, uncontrollable costs. Controllable costs are those which
can be controlled or influenced by a conscious management action. Uncontrollable costs
cannot be controlled or influenced by a conscious management action.
6. By normality: normal costs and abnormal costs. Normal costs arise during routine day-to-
day business operations. Abnormal costs arise because of any abnormal activity or event
not part of routine business operations. E.g. costs arising of floods, riots, accidents etc.
7. By Time: Historical Costs and Predetermined costs. Historical costs are costs incurred in
the past. Predetermined costs are computed in advance on basis of factors affecting cost
elements. Example: Standard Costs.
8. By Decision making Costs: These costs are used for managerial decision making.
Standard cost accounting:
n modern cost account of recording historical costs was taken further, by allocating the
company's fixed costs over a given period of time to the items produced during that period, and
recording the result as the total cost of production. This allowed the full cost of products that
were not sold in the period they were produced to be recorded in inventory using a variety of
complex accounting methods, which was consistent with the principles of GAAP (Generally
Accepted Accounting Principles). It also essentially enabled managers to ignore the fixed costs,
and look at the results of each period in relation to the "standard cost" for any given product.
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40. For example: if the railway coach company normally produced 40 coaches per month, and the
fixed costs were still $1000/month, then each coach could be said to incur an Operating
Cost/overhead of $25 =($1000 / 40). Adding this to the variable costs of $300 per coach
produced a full cost of $325 per coach.
This method tended to slightly distort the resulting unit cost, but in mass-production industries
that made one product line, and where the fixed costs were relatively low, the distortion was very
minor.
For example: if the railway coach company made 100 coaches one month, then the unit cost
would become $310 per coach ($300 + ($1000 / 100)). If the next month the company made 50
coaches, then the unit cost = $320 per coach ($300 + ($1000 / 50)), a relatively minor difference.
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41. Fund accounting
Fund accounting is an accounting system emphasizing accountability rather than profitability,
used by non-profit organizations and governments. In this system, a fund is a self-balancing set
of accounts, segregated for specific purposes in accordance with laws and regulations or special
restrictions and limitations.
Overview:
Nonprofit organizations and government agencies have special requirements to show, in
financial statements and reports, how money is spent, rather than how much profit was earned.
Unlike profit oriented businesses, which use a single set of self-balancing accounts (or general
ledger), nonprofits can have more than one general ledger (or fund), depending on their financial
reporting requirements. An accountant for such an entity must be able to produce reports
detailing the expenditures and revenues for each of the organization's individual funds, and
reports that summarize the organization's financial activities across all of its funds.
A school system, for example, receives a grant from the state to support a new special education
initiative, another grant from the federal government for a school lunch program, and an annuity
to award teachers working on research projects. At periodic intervals, the school system issues a
report to the state about the special education program, a report to a federal agency about the
school lunch program, and a report to another authority about the research program. Each of
these programs has its own unique reporting requirements, so the school system needs a method
to separately identify the related revenues and expenditures.
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42. Federal government funds
Federal government accounting uses two broad groups of funds: the federal funds group and the
trust funds group.
Federal funds group:
• General fund. Technically, there is just one general fund, under the control of the United
States Treasury Department. However, each federal agency maintains its own self-
balancing set of accounts. The general fund is used to account for receipts and payments
that do not belong to another fund.
• Special funds are similar to the special revenue funds used by state and local
governments, earmarked for a specific purpose (other than business-like activities).
• Revolving funds are similar to the Proprietary funds used by state and local governments
for business-like activities. The term, revolving, means that it conducts a continuing cycle
of activity. There are two types of revolving funds in the Federal Funds Group: public
enterprise funds and intergovernmental revolving funds.
o Public enterprise funds are similar to the enterprise funds used by state and local
governments for business-like activities conducted primarily with the public. The
Postal Service Fund is an example of a public enterprise fund.
o Intergovernmental revolving funds are similar to the internal service funds used
by state and local governments for business-like activities conducted within the
federal government.
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43. Trust funds group:
• Trust funds are earmarked for specific programs and purposes in accordance with a
statute that designates the fund as a trust. Its statutory designation distinguishes the fund
as a trust rather than a special fund. The Highway Trust Fund is an example of trust
funds.
• Trust Revolving Funds are business-like activities, designated by statute as trust funds.
They are, otherwise, identical to public enterprise revolving funds.
• Deposit funds are similar to the agency funds used by state and local governments for
assets belonging to individuals and other entities, held temporarily by the government.
State income taxes withheld from a federal government employee's pay, not yet paid to
the state, are an example of deposit funds.
Nonprofit organizations
Nonprofit organizations generally use the following five categories of funds.
• Current fund unrestricted. This fund is used to account for current assets that can be used
at the discretion of the organization's governing board.
• Current funds restricted use current assets subject to restrictions assigned by donors or
grantors.
• Land, building and equipment fund. Cash and investments reserved specifically to
acquire these assets, and related liabilities, should also be recorded in this fund.
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44. • Endowment funds are used to account for the principal amount of gifts the organization is
required, by agreement with the donor, to maintain intact in perpetuity or until a specific
future date or event.
• Custodian funds are held and disbursed according to the donor's instructions.
Fund accounting fiscal cycle (fictitious example)
The following is a simplified example of the fiscal cycle for the general fund of the City of
Tuscany, a fictitious city government.
Opening entries
The fiscal cycle begins with the approval of a budget by the mayor and city council of the City
of Tuscany. For Fiscal Year 2009, which began on July 1, 2008, the Mayor's Office estimated
general fund revenues of $35 million from property taxes, state grants, parking fines and other
sources. The estimate was recorded in the fund's general ledger with a debit to Estimated
Revenues and a credit to Fund Balance.
Ledger Account Debit Credit
1 Estimated revenues $35,000,000
Fund balance $35,000,000
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45. An appropriation was approved by the city council, authorizing the city to spend $34 million
from the general fund. The appropriation was recorded in fund's general ledger with a debit to
Fund Balance and a credit to Appropriations.
Ledger Account Debit Credit
2 Fund balance $34,000,000
Appropriations $34,000,000
In subsidiary ledgers, the appropriation would be divided into smaller amounts authorized for
various departments and programs, such as:
Fire department $5,000,000
Police department $5,000,000
Schools $10,000,000
Public works $6,000,000
Transportation $4,000,000
Mayor's office $4,000,000
The complexity of an appropriation depends upon the city council's preferences; real-world
appropriations can list hundreds of line item amounts. An appropriation is the legal authority for
spending[46]
given by the city council to the various agencies of the city government. In the
example above, the city can spend as much as $34 million, but smaller appropriation limits have
also been established for individual programs and departments.
Governmental Accounting
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46. Governmental accounting is an umbrella term which refers to the various accounting systems
used by various public sector entities. In the United States, for instance, there are two levels of
government which follow different accounting standards set forth by independent, private sector
boards. At the federal level, the Federal Accounting Standards Advisory Board (FASAB) sets
forth the accounting standards to follow. Similarly, there is the Governmental Accounting
Standards Board (GASB) for state and local level government.
For governments to achieve the objective of accountability, financial information must be both
relevant and reliable for reasonably informed users. Financial reports must satisfy numerous and
diverse needs or objectives, including short-term financial position and liquidity, budgetary and
legal compliance, and issues having a long-term focus such as capital budgeting and
maintenance. Additionally, differences exist in the amount of detail that various users need.
Public vs. Private Accounting
There is an important difference between private sector accounting and governmental
accounting. The main reasons for this difference is the environment of the accounting system. In
the government environment, public sector entities have different goals, as opposed to the private
sector entities' one main goal of gaining profit. Also, in government accounting, the entity has
the responsibility of fiscal accountability which is demonstration of compliance in the use of
resources in a budgetary context. In the private sector, the budget is a tool in financial planning
and it isn't mandatory to comply with it.
Government accounting refers to the field of accounting that specifically finds application in the
public sector or government. A special field of accounting exists because: - The objectives to
which accounting reports to differ significantly from that for which generally accepted
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47. accounting practice has been developed for in the private (business) sector; & - The usage of the
results of accounting processes of government differs significantly from the use thereof in the
private sector.
Governmental GAAP Hierarchy
 Category (a) consists of GASB Statements and Interpretations and AICPA and Financial
Accounting Standards Board (FASB) pronouncements that have been specifically made
applicable to state and local governmental entities by GASB Statements or Interpretations
(periodically incorporated in the Codification of Governmental Accounting and Financial
Reporting Standards).
 Category (b) consists of GASB Technical Bulletins and AICPA Industry Audit and
Accounting Guides and Statements of Position that have been specifically made applicable to
state and local governments by the AICPA and approved by the GASB.
 Category (c) consists of AICPA Accounting Standards Executive Committee (AcSEC)
Practice Bulletins that have been specifically made applicable to state and local governments by
the AICPA and approved by the GASB. Also included are consensus positions of groups of
accountants organized by the GASB that attempt to reach consensus on accounting issues
applicable to statement and local governmental entities. (GASB has not organized such a group
as of the date this handbook was released.)
 Category (d) includes GASB Implementation Guides published by GASB staff. Additionally,
practices that are widely recognized and prevalent in state and local government are included in
this category.
 GASB Concepts Statements
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48. • Pronouncements referred to in categories (a) through (d), SAS 69, paragraph 10, of the
hierarchy for nongovernmental entities when not specifically made applicable to state and
local governments:
• FASB Concepts Statements
• AICPA Issues Papers
• Statements of the International Accounting Standards Committee
Fund financial statements
The fund financial statements focus on major individual funds of the state with non-major funds
aggregated into a single column regardless of fund type. In conjunction with the fund statements,
the state presents a summary reconciliation between the fund financial statements and the
government-wide financial statements.
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49. At the fund statement level, governmental funds use the current financial resources measurement
focus and the modified accrual basis of accounting. Proprietary funds use the economic resources
measurement focus and the accrual basis of accounting. Fiduciary funds are reported consistent
with proprietary funds except for the recognition of certain liabilities of defined benefit pension
plans.
The state's fund financial statements include:
Governmental Funds
• Balance Sheet
• Statement of Revenues, Expenditures, and Changes in Fund Balances
Proprietary Funds
• Statement of Fund Net Position
• Statement of Revenues, Expenses, and Changes in Fund Net Position
• Statement of Cash Flows
Fiduciary Funds
• Statement of Fiduciary Net Position
• Statement of Changes in Fiduciary Net Position
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50. Conclusion:
Accounting is famously known as the "language of business". Through the financial statements,
the end-product reports in accounting, it delivers information to different users.
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51. Accounting professionals work in at least one of the 4 major areas of accounting practice: public
accounting, private accounting, government accounting, and accounting education.
Accounting professionals in public accounting work in CPA firms or individually in providing
accounting and auditing services to clients.
Accounting is a means through which information about a business entity is communicated.
Technical definitions of accounting have been published by different accounting bodies. The
American Institute of Certified Public Accountants (AICPA) defines accounting 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.”
Though I am not a fan of technical definitions, I believe that studying the statement above will
give us a better understanding of accounting.
Reference:
www.Google.com
www.wikipedia.org
Principles of Cost Accounting - Edward J. Vander beck - Google Books. Books.google.co.uk.
Retrieved 2013-03-01.
"Investopedia: Cracking the Nonprofit Accounting Code". Forbes.com. Retrieved 2010-03-19
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52. "Department of Accounting". Foster School of Business. Foster School of Business. 2013.
Retrieved 31 December 2013.
The Relevance and Utility of Leading Accounting Research, The Association of Chartered
Certified Accountants, 2010.
Knowledge guide to UK Accounting Standards, ICAEW, 2014, retrieved January 1, 2014.
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