Types of Accounting
As per financial literature, there are broadly two types of accounting – Financial Accounting and Management Accounting. Financial accounting concerns with preparation of financial statements. On the other hand Management accounting refers to interpretation of financial statements and cost accounting, etc.
Financial accounting deals with the preparation of financial statements for the purpose of providing information to various stakeholders including creditors, shareholders, banks, financial institutions, government, consumers, etc. Income statement and Balance Sheet are two important statement in financial accounting which indicates the way according to which business have been conducted during a given period of time.
The significance of financial accounting lies in the fact that it aids the management in directing and controlling the activities of the firm and to frame relevant managerial policies related to areas like production, sales, financing, etc.
Financial Accounting also have drawbacks which are discussed below –
- Financial accounting provides information which is of consolidation nature. It does not indicate a break-up for different departments, processes, products and jobs. As such, it becomes difficult to evaluate the performance of different sub-units of the organisation.
- It does not indicate the cost behavior as it does not differentiate between fixed and variable cost.
- The nature of information provided by financial accounting is of historical nature, hence its use has limitation.
This is one of the types of accounting which is exclusively for management. Management accounting is concerned with providing the accounting in such a manner that it helps in taking decisions and making important policies for the business. It is known as tailor made accounting.
Its basic purpose is to communicate the facts according to the specific needs of decision-makers by presenting the information in a systematic and meaningful manner. Management accounting, therefore, specifically helps in planning and control.
It helps in setting standards and in case of variances between planned and actual performances, it helps in deciding the corrective action. An important characteristic of management accounting is that it is forward looking. Its basic focus is one future activity to be performed and not what has already happened in the past. Since management accounting caters to the specific decision needs, it does not rest upon any well-defined and set principles.