Financial Management & Cost Accounting

Lesson 4. TYPES OF ACCOUNTING

Module 1. Introduction to financial management

Lesson 4

TYPES OF ACCOUNTING

4.1 Types of Accounting

To serve the purpose of achieving different objectives, different branches of accounting hove emerged. The main among them are:-

4.1.1 Financial Accounting

The main aim of financial accounting is to ascertain the profit / loss made by the firm during a particular period and at the same time to ascertain the “financial position’ of the firm at the end of the period (or on a particular date). Financial accounting is guided by many rules and regulations which may or may not be mandatory. The primary focus of financial accounting is to provide information to the outsider’s viz. shareholders, investors, government authorities, financial institutions, banks, creditors and other interested parties. The data contained in the financial statements (profit & loss account & balance sheet) can be used by the external stake holders to evaluate the profitability, liquidity, solvency etc of the firm.

4.1.2 Cost Accounting

Cost accounting is defined as the systematic recording, classifying and summarizing of all the costs incurred by the firm in carrying out various activities. The aim of cost accounting is to ascertain the cost of product or service. It therefore, facilitates cost control & cost reduction by identifying & exercising control over the main elements of cost (viz. material, labour & overheads). It enables the business firm is fixing the selling price of the product, preparing quotations etc. Hence cost accounting is primarily focussed on “managers/ internal users” for cost control.

4.1.3 Management Accounting

This special type of accounting is basically used for the purpose of “Decision Making”. This accounting is prepared exclusively for the use of management & hence called “management accounting”. Management accounting makes the use of information contained in “financial accounting” & “cost accounting” and helps the management in taking decisions regarding- policy formulation, planning, control, strategy etc. Clearly, management accounting is used for internal planning & control of activities.

Table 4.1. Difference between Financial accounting & Cost accounting