Branches of Accounting and Users of Accounting Information 1

Chapter 2
Branches of Accounting and Users of Accounting Information

Learning Competencies
The learners should be able to…………..
1. Differentiate the branches of accounting.
2. Explain the kind or type of services rendered in each of the branches of accounting.
3. Define external users and give examples.
4. Define internal users and give examples.

Common branches of accounting

1. Financial accounting - is the branch of accounting that focuses on general purpose financial
statements. General purpose financial statements are those that cater to the common needs of a
wide range of external users.

2. Management accounting - involves the accumulation and communication of information for

use by internal users. An offshoot of management accounting is management advisory
services which includes services to clients on matters of accounting, finance, business policies,
organization procedures, product costs, distribution, and many other phases of business conduct
and operations.

Financial Accounting Management Accounting

 Focuses on the information needs of  Focuses on the information needs of
external users. internal users.

The scope of this book is the fundamentals of financial accounting. Overviews on some
management accounting topics, as well as tax accounting, are provided in Part 2 of this book.

3. Government accounting - refers to the accounting for the government and its
instrumentalities, focusing attention on the custody of public funds, the purpose or purposes to
which such funds are committed, and the responsibility and accountability of the individuals
entrusted with such funds.

4. Auditing - is a process of objectively evaluating evidence and expressing an opinion

regarding the correspondence between management’s assertions and established criteria.

5. Tax accounting - is the preparation of tax returns and rendering of tax advice, such as the
determination of tax consequences of certain proposed business endeavors.

6. Cost accounting - is the systematic recording and analysis of the costs of materials, labor and
overhead incident to the production of goods or rendering of services.

7. Accounting education - refers to teaching accounting and accounting-related subjects in an

organized learning environment. It is a process of facilitating the acquisition of knowledge and
skills regarding one or more of the other branches of accounting.

8. Accounting research - pertains to the careful analysis of economic events and other variables
to understand their impact on decisions. Accounting research includes a broad range of topics,
which may be related to one or more of the branches of accounting, the economy as a whole, or
Branches of Accounting and Users of Accounting Information
the market environment, examples are provided below:
Accounting research topic
 Impact of fair value measurement on the  Financial accounting.
financial statements.
 Inventory management and its effects on  Management accounting.
earnings.
 Internal controls and modern  Auditing.
technology.
 Becoming a certified public accountant.  Accounting education
Summary:
Branch of Accounting Types of accounting service
provided
1. Financial accounting  General record-keeping,
i.e., maintenance of
Journals and Ledgers.
 Preparation of general
purpose financial
statements (FS).
2. Management  Preparation of specifically
accounting tailored management
reports.
3. Government  General record-keeping
accounting and preparation of financial
reports for the government
and its agencies. It also
includes the preparation of
budgets and accountability
reports.
4. Auditing  Expression of an opinion
on the correspondence
between management
assertions and established
criteria.
2
Related branch of accounting
Users of service
 All businesses use
financial accounting in
their record-keeping.
These records provide
information that is also
used in other branches of
accounting.
 Businesses prepare
general purpose FS at
least annually for the use
of lenders, investors, or
government regulatory
bodies.
 Required by management
to aid them in performing
their management
functions.
 Required by the
government and its
agencies.
 Businesses with gross
quarterly revenues of
P150,000 required to have
their financial statements
audited by an independent
Certified Public
Accountant (CPA).
Branches of Accounting and Users of Accounting Information 3

5. Tax Accounting  Preparation of tax returns.  All businesses are

required to file tax
*Failure to file tax returns returns.
results to penalty and
imprisonment of not less
than 1 year but not more
than 10 years.

 Providing tax advice.

 Some taxpayers may
require the professional
advice of a tax
practitioner regarding the
management of taxes.

6. Cost Accounting  Analyses of costs of  Businesses use cost

products or services.
accounting to analyze the
cost of their products or
services and the effects of
those cost in, among
others, earnings and
pricing policies.

7. Accounting Education  Teaching of accounting  Required by business

and related subjects. students, business owners,
accounting practitioners
in their Continuing
Professional Development
(CPD), and other
interested parties.

8. Accounting Research  Accounting research  Required by business

papers, articles and similar owners, professional
publications. organizations, and other
interested parties.

Users of Accounting Information

Users of accounting information are broadly classified into two, namely:

1. Internal users - those who are directly involved in managing the business. Examples of
internal users include:
a. Business owners who are directly involved in managing the business
b. Board of directors
c. Managerial personnel

2. External users - those that do not have the authority to demand financial reports tailored to
their specific needs. These are those who are not directly involved in managing the business.
Examples of external users include:
Branches of Accounting and Users of Accounting Information 4

a. Existing and potential investors (e.g., stockholders who are not directly involved in
managing the business)
b. Lenders (e.g., banks) and Creditors (e.g., suppliers)
c. Government agencies (e.g., Bureau of Internal Revenue ‘BIR’, Securities and
Exchange Commission ‘SEC’)
d. Non-managerial employees
e. Customers
f. Public

Directly
involved in
managing the
business?

Yes No

Internal user External user

Types of accounting information classified as to user’s needs

1. General purpose accounting information - is information designed to meet the common
needs of most statement users. It is provided by financial accounting and is prepared primarily
for external users.

2. Special purpose accounting information - is information designed to meet the specific needs
of particular statement users. It is provided by management accounting or other branches of
accounting and is prepared primarily for internal users.

Examples of decisions and types of information needed to make those decisions

User
1. External user (Investor)
Example of decision to Example of information
make needed
 Existing investor:  Audited financial
Whether to hold or sell statements of the
investment in stocks. business to aid in
 Potential investor: analyzing the value of
Whether or not to buy the company. (General
shares of stocks. purpose information)

2. External user (Lender or  Lender: Whether or not  Audited financial

supplier) to extend a loan to a statements of the
business. business to aid in
 Supplier: Whether or not analyzing the company’s
to extend credit to a ability to pay its debts.
business. (General purpose
information)
3. Internal user (Manager)  Whether or not to  Analysis of the effects of
increase the sale price of sales volume and sales
a product. prices to earnings.
Branches of Accounting and Users of Accounting Information 5

(Special purpose
information)

4. Internal user (Manager)  How much capital is  Budget report. (Special

needed to manufacture a purpose information)
new product?