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Branches of Accounting

"Different branches of accounting serve different purposes."

Accounting has evolved to meet various information needs of stakeholders. The field is broadly divided into three main branches.

The Three Pillars of Accounting

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1. Financial Accounting

Definition: Recording, classifying, and summarizing business transactions to prepare financial statements for external users.

Purpose:

  • Show the financial position and performance of the business
  • Comply with legal and statutory requirements

Users:

  • Shareholders
  • Creditors/Banks
  • Government/Tax authorities
  • Investors

Key Outputs:

  • Income Statement (P&L Account)
  • Balance Sheet
  • Cash Flow Statement

Example:
Tata Motors publishes annual financial statements showing revenue of ₹3 Lakh Crores, profit of ₹10,000 Crores, and assets worth ₹2.5 Lakh Crores.

2. Cost Accounting

Definition: Recording and analyzing costs to help in cost control and cost reduction.

Purpose:

  • Determine cost of production
  • Control costs
  • Fix selling prices
  • Prepare budgets

Users:

  • Internal Management
  • Production Managers
  • Department Heads

Key Techniques:

  • Job Costing
  • Process Costing
  • Standard Costing
  • Marginal Costing

Example:
Maruti Suzuki calculates that manufacturing one Swift car costs ₹3.5 Lakhs (materials ₹2L + labor ₹50K + overheads ₹1L). This helps set the selling price at ₹6 Lakhs.

3. Management Accounting

Definition: Using accounting and financial data to help management make informed business decisions.

Purpose:

  • Planning and forecasting
  • Decision-making (make or buy, expand or shut down)
  • Performance evaluation
  • Control

Users:

  • Top Management
  • Department Managers
  • Strategic Planners

Key Tools:

  • Budgeting
  • Variance Analysis
  • Ratio Analysis
  • Break-even Analysis
  • Cost-Volume-Profit Analysis

Example:
HDFC Bank uses management accounting to decide whether to open 100 new branches or invest in digital banking infrastructure. Analysis shows digital gives 30% higher ROI.

Detailed Comparison

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Other Specialized Branches

4. Tax Accounting

  • Focus: Compliance with Income Tax Act, GST Act
  • Example: Calculating tax liability, filing ITR, claiming deductions

5. Audit & Assurance

  • Focus: Verification and certification of financial statements
  • Example: CA firms auditing company accounts

6. Forensic Accounting

  • Focus: Investigating financial fraud and irregularities
  • Example: Detecting the Satyam scam (₹7,000 Crore fraud)

7. Social Accounting

  • Focus: Measuring social and environmental impact
  • Example: CSR expenditure reporting

Real-World Integration

Example: Reliance Industries

  1. Financial Accounting: Publishes annual report showing ₹8 Lakh Crore revenue, complying with Ind AS.
  2. Cost Accounting: Analyzes that refining 1 barrel of crude costs $45, helping optimize operations.
  3. Management Accounting: Uses data to decide on investing ₹75,000 Crores in Jio 5G vs expanding petrochemicals.

All three work together to provide a complete picture!

Importance of Each Branch

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Quiz: Branches of Accounting

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