Branches of Accounting, Uses of Accounting and Limitations of Financial Accounting

Accounting vs. Bookkeeping Bookkeeping deals with the recording (correctly and in a set of books) of those transactions that result in the transfer of money or the value of money. While accounting is comprehensive in perspective. It extends to classifying, summarizing, presenting, and even analyzing accounting information.

Accounting vs. Accounting

The body of knowledge (consisting of principles, postulates, assumptions, conventions, concepts, and rules) that governs the science of recording, classifying, and analyzing financial transactions is accounting. While the practice and art of accounting science is called accounting, in order to meet the ever-increasing demands for accounting from different stakeholders (such as owners, managers, creditors, tax authorities, etc.) the various branches. Financial Accounting The object of financial accounting is to determine the result (profit or loss) of business operations during a particular period and to establish the financial position (Balance Sheet) on a date at the end of the period.

Cost accounting

The object of cost accounting is to find out the cost of goods produced or services provided by a company. It also helps the company control costs by indicating avoidable losses and waste. Management Accounting The purpose of management accounting is to provide relevant information at the appropriate time to management to enable it to make decisions and exercise control. In this web manual, we are only dealing with financial accounting. The objectives of financial accounting, as stated above, can only be achieved by systematically recording financial transactions according to a set of principles. Recorded information must be classified, analyzed and presented in such a way that business results and financial condition can be determined.

Accounting Uses

Accounting plays an important and useful role in developing information to provide answers to many questions faced by users of accounting information.

(1) How good or bad is the financial condition of the business?

(2) Has the business activity resulted in a profit or loss?

(3) How well have the different departments of the business performed in the past?

(4) What activities or products have been profitable?

(5) Of the existing products, which should be discontinued and whose production should be increased.

(6) Buy a component on the market or manufacture it?

(7) Is the production cost reasonable or excessive?

(8) What has been the impact of the existing policies on the profitability of the business?

(9) What are the likely results of the new policy decisions on the firm’s future earning capacity?

(10) In light of past business performance, how should you plan for the future to ensure desired results?

Those mentioned above are some examples of the types of questions faced by users of accounting information. These can be answered satisfactorily with the help of proper and necessary information provided by accounting.

In addition, accounting is also useful in the following aspects:

(1) Higher turnover results in a large number of transactions and no trader can remember everything. Accounting records avoid the need to remember multiple transactions.

(2) The accounting record, prepared on the basis of uniform practices, will allow a company to compare the results of one period with another period.

(3) The tax authorities (both income tax and sales tax) are likely to believe the facts contained in the set of accounting books if they are kept in accordance with generally accepted accounting principles.

(4) Cocoon records, supported by proper and authenticated proof, are good evidence in a court of law.

(5) If a business is to be sold as a going concern, the values ​​of the various assets shown on the balance sheet help to negotiate the right price for the business.

Limitations of Financial Accounting

The advantages of accounting discussed in this section do not suggest that accounting is free of limitations.

The following are the limitations:

Financial accounting allows for alternative treatments Accounting is based on concepts and follows “generally accepted principles”, but there is more than one principle for the treatment of any item. This allows for alternative treatments within the framework of generally accepted principles. For example, a company’s closing stock can be valued using any of the following methods: FIFO (first in, first out), LIFO (last in, first out), mid price, standard price, etc., but the results are not comparable.

Financial accounting does not provide timely information

It is not a limitation when using high powered software applications like HiTech Financial Accenting to maintain online and concurrent accounts where the balance is available almost instantly. However, manual accounting has this shortcoming.

Financial accounting is designed to provide information in the form of statements (Balance Sheet and Profit and Loss Account) for a period of normally one year. Therefore, the information is at best of historical interest and only a ‘post-mortem’ analysis of the past can be performed. The business requires timely information at frequent intervals to enable management to plan and take corrective action. For example, if a company has budgeted that sales for the current year should be $12,00,000, then it requires information whether sales in the first month of the year were $10,00,000 or less or more.

Traditionally, financial accounting is not supposed to provide information at shorter intervals of less than one year. With the advent of computerized accounting, software like HiTech Financial Accounting now displays profit and loss account and monthly balance sheet to overcome this limitation. Financial accounting is influenced by personal judgments. The ‘objectivity convention’ is respected in accounting, but to record certain events estimates must be made that require personal judgement. It is very difficult to expect precision in future estimates and objectivity suffers. For example, to determine the amount of depreciation to be charged each year for the use of fixed assets, an estimate is required and the income disclosed by accounting is not reliable but ‘approximate’.

Financial accounting ignores important non-monetary information

Financial accounting does not consider those transactions of a non-monetary nature. For example, degree of competition that the company faces, technical innovations that the company possesses, loyalty and efficiency of the employees; changes in the value of money, etc. they are the important matters in which the management of the business is very interested, but accounting is not designed to take note of such matters. Therefore, any user of financial information is naturally deprived of vital information that is not of a monetary nature. In modern times, good accounting software with MIS and CRM can go a long way to partially overcome this limitation.

Financial accounting does not provide a detailed analysis

The information provided by financial accounting is actually aggregates of financial transactions during the course of the year. Of course, it allows to study the general results of the business, information on the cost, income and profit of each product is required, but financial accounting does not provide such detailed information regarding the product. For example, if the company made a total profit of, say, $5,00,000 during the accounting year and sells three products, namely gasoline. mobile diesel and oil and want to know the profit made by each product Financial accounting probably won’t help you unless you use a computerized accounting system capable of handling such complex queries. Many reports in computer accounting software like HiTech Financial Accounting, which are explained with charts and reports customized to business needs, overcome this limitation.

Financial Accounting does not reveal the present value of the business

In financial accounting, the position of the company on a particular date is shown by a statement known as ‘Balance Sheet’. On the Balance Sheet, assets are shown on a “Continuing Entity Concept” basis. Therefore, the business is assumed to have a relatively longer life and will continue to exist indefinitely, hence the asset values ​​are ‘going concern values’. The ‘realized value’ of each asset if it is sold today cannot be known by studying the balance sheet.