CHAPTER 2/LESSON 2-BRANCHES OF ACCOUNTING

INTRODUCTION

 Aside from the accounting process mentioned in Chapter –I , (i.e. identification-recording-communication), accountants can offer
other services. In this chapter, we will tackle the different branches of accounting and the different services provided by these
branches.

Eight Branches of Accounting (Each branch has its own functions and use.)
1. Financial accounting-is a branch of accounting primarily handling the recording of financial transactions of a business. The financial
transactions are later summarized into standardized accounting reports, more popularly known as the financial statements, for the benefit
of internal and External users.

Financial statement should provide information useful to a wide range of users in their economic decisions. This is the main
reason why accounting standards such as the Philippine Financial Reporting Standards (PFRS) and the Philippine Accounting Standards
(PAS) are created. The PFRS and PAS supply guidelines on how companies should prepare their financial statements. Standardized
financial statements allow the users to compare the result of operations of different companies regardless of size and nature.

Financial accounting caters to the need of both internal and external users. Financial accounting ‘s main goal is to provide the
information needs of external users that have no capacity to request information directly from the management.

General Purpose of financial statements

Are the Financial statements prepared to accommodate the information needs of persons who have no capacity to request or
acquire information the company?

If your answer is yes, the financial statements are called general purpose financial statements. Otherwise , the financial
statements are called special purpose financial statements.

Primary Users of General Purpose Financial Primary users of Special Purpose Financial Statements
Statements
1. Investors 1.Top management (e.g.) Board of Directors of a Company (CEO,
CFO)
2. Creditors 2. Department Managers (e.g. sales manager, production manager)
3. Shareholders/stockholders 3. Other internal parties
4. Auditors & other interested parties
External parties use general purpose financial statements to evaluate the performance of the company. On the other hand ,
specific purpose financial statements are utilized by internal parties to guide them in the decision-making process for the company.

2. Management accounting

Is a branch of accounting which focuses on the preparation of financial reports used by managers in their day-to-day decision –
making. Reports generated using management ac counting are for internal users. As such, management reports need not follow
accounting standard such as the PFRS and PAS. Additionally, unlike financial reports that are generated quarterly, semi-annually, or
annually, management reports can be done daily, weekly or whenever managers require a specific report.

Predominantly, external parties use general purpose financial statements to evaluate the performance of the company. On the
other hand, special purpose financial statements are utilized by internal parties to guide them in decision-making process for the company.

Management reports typically contain information regarding the amount of cash on hand, the level of sales revenue for a
particular period, costs incurred , or even the comparison of actual results with budgeted amounts.

Aside from the frequency and the intended users of reports, management accounting differs from financial accounting in the
nature of information produced. Financial accounting summarizes financial information gathered within a specific period. Thus ,
financial accounting provides information that is historical. Meanwhile management accounting information is forward-looking. It
contains forecasted information used by managers in planning.

Roles of Management Accountants . According to the chartered Institute of Management Accountants (CIMA)chartered management
accountants the following roles:

1. Advise managers about the financial implications of the project

2. Explain the financial consequences of business decision
3. Formulate business strategy
4. Monitor spending and financial control
5. Conduct internal business audits
6. Explain the impact of the competitive landscape
7. Bring a high level of professionalism and integrity 0f the business

It is emphasized that management accounting is used in deciding how the business should act forward. The use of management
accounting provides value to the business since it assists the company in selecting only those activities that deliver benefits more than the
related costs.
3. Government Accounting
According to section 109 of the PD 1445, Government accounting is defined as an accounting system which “encompasses the
process of analyzing, recording, classifying, summarizing, and communicating all transactions involving the receipt and disposition of
government fund and property and interpreting the result thereof”.
Section 110 of the same PD lays down the objectives of government accounting:
1. To provide information concerning past operations and present conditions.
2. To provide basis for guidance for the future operations
3. To provide for control of the acts of public bodies and offices in the receipt, disposition, and utilization of funds and property.
4. To report on the financial position and the results of operations of government agencies for the information and guidance of all
persons concerned.
New Government Accounting System (NGAS)
As citizens of the Philippines, we are very much concerned on the stewardship of the government of the public resources. We do
not want the country’s funds to be used for personal reasons by erring public officials. Instead we want these fund to be used for public
projects that will benefit many constituents

One of the main features of the NGAS is that it enhances responsibility accounting in all agencies. Simply stated, responsibility
accounting relates financial results to a particular responsibility center (i.g .agency). If there is a problem with the handling of funds by
the DPWH, for example, people in that agency will be the ones accountable. This system of placing accountability in each agency
discourages misappropriation and misuse of public funds.

The government accounting process involves the commission on audit (COA), the Department of Budget and Management
(DBM) , and the Bureau of Treasury (BTR) and all other agencies.
COA- responsible for the keeping of the government’s general accounts. - Tasked to keep and update the accounting books of
the whole organization.
- disseminates accounting rules and regulations to be used by all agencies.

DBM- shall be responsible for the formulation and implementation of the National Budget with the goal of attaining our national
socio-economic plans and objectives.
- responsible for the efficient and sound utilization of government funds and revenues to effectively achieve the country’s
development objectives.

BTR- is responsible for the safekeeping of the national funds. It serves like a bank where the funds are kept.
- main role is the safekeeping of funds,
- responsible for the management and control of the disbursements of such funds.
- also responsible in maintaining accounts of financial transactions of all national government agencies.
4. Auditing
Is an unbiased examination and evaluation of the financial statements of an organization. Auditing is a process that includes
numerous steps to determine whether or not a company’s financial statements are presented truthfully. Accountants that perform the
auditing procedure are specifically called Auditors

An audit of the financial statements improves their credibility. Financial statements that underwent the process of auditing are
called Audited Financial Statements. A set of the financial statements will only be useful to users after it has gone through the process of
auditing. Audited financial statements are accompanied by the auditor’s opinion. The auditor’s opinion will be the basis whether or not
the financial statements are prepared truthfully and without any material errors.

5. Tax Accounting
Taxes are the lifeblood of the government. Without the taxes the citizens pay, the government cannot perform its functions.
Thus , it is imperative that the collection of taxes be unhindered.

The recording of financial transactions mentioned in Chap 1 follows specific guidelines provided by the PFRS and PAS. Tax
accounting records some financial transactions in a different manner. . It adheres to some guidelines in the PFRS & PAS, but it is not
required to implement everything written in such standards. Tax accounting follows the pronouncements of the National Internal
Revenue Code (NIRC). The NIRC is to tax accounting as the PFRS & PAS are to financial accounting.

Tax accounting- is enables the taxing authorities to collect taxes that differ from the amount due computed using the financial
accounting standards. Financial accounting generates reports known as the financial statements while the Tax accounting produces tax
returns to be filed to the appropriate government agencies.

6. Cost accounting
Is a branch of accounting that provides information for management accounting and financial accounting. For example, cost
accounting helps measure the cost of a bicycle for a bicycle-selling company. This information supports management in deciding how
many bicycles to produce, the selling price of the bicycle, or valuing the inventory of bicycles in the company’s financial statements

Terms used in Cost Accounting

1. Cost- the resource sacrificed to achieve an objective ( e,g) money, resources, time, etc)
2. Cost objective – anything that you wish to find a cost of (e.g. cost of a pair of jeans, cost of a pair of jordan XI shoes)
3. Cost driver – an activity that is a cause of the incurrence of costs ( e.g. the number of working hours is related to the amount of
salaries a company pays.)
4. Indirect Cost – costs that cannot be traced to a cost object (e.g. costs of supplies used in factory, salary of supervisor overseeing
factory operations, etc)
5. Direct Cost – costs that can economically be traced to a cost object (e,g, materials, labor, etc)
6. Fixed costs – costs that do not change within a relevant range of activity (e.g. rent of a factory building, insurance costs, etc.)
7. Variable costs- costs that change as the level of activity or production increases (e.g. material cost, labor cost, selling cost, etc.)
7. Accounting education
The Bachelor of Science in Accountancy (BSA) in the Philippines is normally 5-year program composed of subjects in
accounting, audit, administration, and business laws and taxation. Although the subjects usually highlight the business environment, the
scope of the topics in BSA also covers other fields such as banking and finance, government, non-profit organizations, and the academe.
Students of the course are also trained to create and understand computerized accounting systems to cope with the rapidly changing
technology.
Most schools use combination of diverse teaching techniques to explain accountancy to students. Some of these methods are
classroom discussion, case analysis, individual and group reporting, feasibility studies, and lectures from renowned individuals in the
field. Other schools require students to undergo an internship program equivalent to one subject. This is to enable the students to have a
feel of the application of accounting in real life.

Admission Requirements for BSA

According to CHED, the standards of admission to any BSA program should be sufficiently rigorous and demanding. Only
universities which can demonstrate the capability to teach accountancy in a sufficiently high level are allowed to do so. Requirements at
each
school are different, but the common requirements include:
1. Must be a high school graduate
2. Must have a college entrance examination of above average or depending on the specific rating set by the school.

Board Exam

Before a BSA graduate can practice accountancy, he/she needs to pass the certified public accountant Licensure Examination.
The CPA licensure exam is a comprehensive test composed of 7 subjects. Each subject will be taken within 3 hours so the exam will be
21 hours al in all. A candidate should achieve a general average of at least 75% with no rating below 60% in any of the 7 subjects in
order to pass the exam.

8. Accounting research

Is a branch of accounting that deals with the creation of new knowledge. Combining the models produced by the hard sciences in
research and testing with financial statements, stock prices, surveys, and experiments, we can gain a specific perspective and basis on the
following:
 Deciding and implementing new accounting and auditing standards
 Presenting unusual economic transactions in the financial statements.
 Learning how new tax laws impact clients and employers
 Discerning how the accounting profession affects the capital markets through academic accounting research.
 Researchers in the accounting field also apply the scientific method like their counterparts in the sciences. With the constantly
evolving field of accountancy, it is expected that accounting research will continue to play a vital role in the future.