Which branch of accounting is concerned with interpretation and analysis of financial statements?

Posted by Neha De

April 21, 2022    |     4-minute read (688 words)

Accounting is carried out to provide reliable, accurate and timely financial information to the various stakeholders of a company. It allows them to analyze the results of business operations, determine a company's financial position, its solvency and make rational decisions.

There are several different branches of accounting, all of which came into existence keeping in view the various types of accounting information needed by different stakeholders, including business owners (management), creditors, suppliers, government agencies, taxation authorities and so on.

To begin with, there are three main branches of accounting: financial accounting, management accounting and cost accounting.

The branches of accounting include the following:

1. Financial Accounting:

Financial accounting deals with the recording and classifying of a company’s financial transactions, as well as preparing and presenting financial statements for internal and external stakeholders. While preparing financial statements, strict compliance with generally accepted accounting principles or GAAP needs to be observed. Financial accounting focuses on the analysis of historical data.

2. Management accounting:

Also called managerial accounting, management accounting primarily provides information for use by internal users, that is, the management of the company. Any information used for managerial decision-making forms part of management accounting. This branch of accounting may not strictly comply with GAAP.

Management accounting comprises budgeting and forecasting, cost analysis, financial analysis, evaluation of business decisions and other such areas.

3. Cost Accounting:

Cost accounting is sometimes considered a subset of management accounting. It refers to the recording, presentation and analysis of costs related to manufacturing. This branch of accounting is extremely useful for manufacturing businesses because they typically have very complicated costing processes.

Cost accounting uses various costing techniques, standards and principles that help companies to develop budgets for controlling costs and be cost-effective.

4. Tax accounting:

This branch of accounting helps customers follow rules laid down by tax authorities. It comprises tax planning and preparation of tax returns, as well as determination of income and other taxes, tax advisory services including analysis of the consequences of tax decisions, methods to minimize taxes legally and other similar tax-related matters.

5. Auditing:

There are two types of auditing: internal and external. Internal auditing refers to the evaluation of the acceptability of an organization’s internal control structure by testing policies and procedures, segregation of duties, degrees of authorization and other controls executed by management.

External auditing, on the other hand, deals with the inspection of financial statements by an independent party to express an opinion as to compliance with GAAP and fairness of presentation. 

6. Accounting information systems:

Accounting information systems tackles the development, installation, execution and tracking of accounting systems and procedures used in the accounting process. This includes accounting personnel direction, employment of business forms and software management.

7. Forensic accounting:

Forensic accounting handles fraud investigation, litigation and court cases, claims and dispute resolution, and other areas that deal with legal matters.

8. Fiduciary accounting:

This branch of accounting deals with accounts managed by a person who is entrusted with the custody and management of another's property or assets. Some examples of the fiduciary branch of accounting are estate accounting, receivership and trust accounting.

9. Public accounting:

Public accounting handles companies that provide accounting advisory services to customers based on their specific needs. This could include auditing work, assisting with preparing tax returns, providing legal advice or consulting on procedures tailored to the installation of technology or computer programs.

10. Governmental accounting:

Governmental accounting deals with the financial planning and allocation of resources to departments within a local, state or federal government. This type of accounting follows standards that comply with the Governmental Accounting Standards Board (GASB), which is responsible for developing consistent accounting procedures for local and state governments.

Federal employees need to comply with the Federal Accounting Standards Advisory Board (FASAB). Governmental accounting also monitors a government's budget and allocates funds appropriately.

Final Words

Accounting is meant to serve the public interest by reporting a firm’s financial situation accurately. Even though all of these branches of accounting focus on different aspects of business or even different types of businesses, they all adhere to facts, follow specific standards and follow ethical processes.

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