Page 8 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 1: Introduction to Accounting

1.2 Branches of Accounting and its Interrelationships Notes

The main objectives of accounting are to record the business transactions and to provide the
necessary information to the internal and external users of the fi nancial statements. In order to

achieve the above objectives, the accounting is classified into followings branches:
1. Financial Accounting: It is the original form of accounting. It refers to the recording of
daily business financial transaction. Recording of the transaction is done in such a way that

the profit of the business may be ascertained after a definite period and the picture of the

financial position of the business may be presented.
2. Cost Accounting: As the name indicates, this accounting is related with the ascertainment
of cost of the product in a period. Under this system, record of raw materials used in
production, wages and labour paid and other expanses incurred on production are kept to
control the costs.
3. Management Accounting: The accounting which provides the necessary information to the
management is called management accounting. Under this, the analysis and interpretation

of the accounts, prepared by financial accounting, are done in a manner so that the managers
may forecast, plan for future and frame the policy.
4. Tax Accounting: Under tax accounting, the accountants prepare the accounts as per the
provisions of taxation. The accounts prepared as per taxation provisions may differ from
the accounts prepared as per fi nancial accounting.

5. Infl ation Accounting: The financial statements are prepared on the basis of historical cost

which do not present the true picture of the financial position and correct profit or loss of

the business due to inflation. Thus, the fresh financial statements are prepared keeping in

mind the price level changes under infl ation accounting.
6. Human Resource Accounting: Human Resource Accounting means the accounting for
human being as now in an organization human being is treated as an asset like other physical
assets. It is recorded in the books like other assets. HRA deals with the measurement of costs
on recruiting, selecting, hiring, training, placing and development of the employees in one
side and on the other side it deals with the present economic value of the employees. For
the determination of the value of human being different methods are used under HRA.

7. Responsibility Accounting: Responsibility accounting is a special technique of management
under which accountability is established according to the responsibility delegated to
the various levels of management. A management information and reporting system is
instituted to give adequate feedback in terms of the delegated responsibility. Under this

system, units of an organization, under a specified authority in a person, are developed as
responsibility center and evaluated individually for their performance.

Relationship of Financial, Cost and Management Accounting

The ICMA, London, defines management accounting as “the application of professional

knowledge and skill in the preparation and presentation of accounting information in such a way
as to assist management in the formulation of various policies and in the planning and control of
the operation of the undertaking”.
The American Accounting Association, committee on management accounting, defi nes
management accounting as “the application of appropriate techniques and concepts in processing
the historical and projected economic data of an entity to assist management in establishing a
plan for reasonable economic objectives and in the making of rational decisions with a view
towards achieving these objectives”.

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