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

Accounting vs. Book-keepingBook-keeping concerns itself with the recording (correctly and in a set of books) of those transactions that result in the transfer of money or money's worth. Whereas accounting is comprehensive in perspective. It extends to classifying, summarizing, presenting and even analyzing accounting information .

Accounting vs. Accountancy

Body of knowledge (consisting of principles, postulates, assumptions, conventions, concepts and rules) governing the science of recording classifying and analyzing financial transactions is accounting. Whereas the practice and art of the science of accounting is termed as accountancy.To meet the ever increasing demands made on accounting by different interested parties (such as owners, management, creditors, taxation authorities etc.) the various branches have come into existence. Financial AccountingThe object of financial accounting is to ascertain the result (profit or loss) of business operations during the particular period and to state the financial position (Balance Sheet) as 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 rendered by a business. It also helps the business in controlling the costs by indicating avoidable losses and wastes.Management AccountingThe object of management accounting is to supply relevant information at appropriate time to the management to enable it to take decision and effect control.In this web primer, we are concerned only with financial accounting. The objects of financial accounting as stated above can be achieved only by recording the financial transactions in a systematic manner according to a set of principles. The recorded information has to be classified, analyzed and presented in a manner in which business results and financial position can be ascertained.

Uses of Accounting

Accounting plays important and useful role by developing the information for providing answers to many questions faced by the 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 the different departments of the business have performed in the past?

(4) Which activities or products have been profitable?

(5) Out of the existing products which should be discontinued and the production of which commodities should be increased.

(6) Whether to buy a component from the market or to manufacture the same?

(7) Whether the cost of production is reasonable or excessive?

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

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

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

Above mentioned are few examples of the types of questions faced by the users of accounting information. These can be satisfactorily answered with the help of suitable and necessary information provided by accounting.

Besides, accounting is also useful in the following respects :-

(1) Increased volume of business results in large number of transactions and no businessman can remember everything. Accounting records obviate the necessity of remembering various transactions.

(2) Accounting record, prepared on the basis of uniform practices, will enable a business to compare results of one period with another period.

(3) Taxation authorities (both income tax and sales tax) are likely to believe the facts contained in the set of accounting books if maintained according to generally accepted accounting principles.

(4) Cocooning records, backed up by proper and authenticated vouchers are good evidence in a court of law.

(5) If a business is to be sold as a going concern then the values of different assets as shown.