Objectives and Branches: Understanding the Basics of Accounting

As a growing business or brand owner, it’s important for you to know the financial position of your business, evaluate and understand the way cash flows in and out, and be able to ascertain the financial health of your business at any point in time. One way to achieve a successful business is to understand the different branches of accounting and how they work to process financial data and communicate all financial and nonfinancial information. 

Accounting and its branches aim to help with record keeping, show profit and loss, enhance decision-making, and protect your company’s assets. So, let’s dive into the topic to understand what accounting is and why it’s essential to your business.

Defining Accounting: What Is It and Why Is It Important

No modern business operations can function effectively without an art like accounting. Unlike other aspects of business, accounting is an art and not a science. It is a process that handles recording, classifying, summarizing, analyzing, and interpreting financial data for businesses, investors, creditors, and stakeholders.

Accounting helps provide all the vital information needed to comprehend the financial health of every organization. This art of recording and taking into account provides transparency in every functioning system. It’s a systematic step and involves recording every single financial transaction. These recordings are organized into financial statements at the end of the day. 

Why Is Accounting Important

The importance of accounting can never be overemphasized in an organization or a system. Without financial transparency, many business and professional organizations will crumble.

Here are some of the major importance of accounting you should know:

1. Provides accurate and reliable financial information: Every organization or brand needs its financial information to evaluate the performance of their brands, individual, or departmental teams to aid in decision-making and management. 
2. Facilitate Strategic Decision Making: Accounting is reliable in making strategic decisions and setting brand goals. For your management team to be able to make certain decisions, they need insight into the brand’s financial health. 
3. Comply with Legal Requirements: Accounting helps brands ensure they meet every legal, regulatory requirement, or tax obligation through an accurate report of the brand’s financial assets. 
4. Determine the Performance of a Brand: The financial statement of an organization or brand gives an insight into its performance and what they have been able to achieve in days, weeks, months, quarterly, and yearly. This way, brands can compare their performance over time and know their strengths and weaknesses.
5. Investor Confidence: At some point, brands will require investors or partners to reach the industry’s top. An accurate accounting or financial statement will boost their investors’ confidence and encourage them to partner or invest in a working and reliable system. 
6. Resource Management: An effective accounting system helps with the allocation and management of resources and utility optimization.

The Three Main Objectives of Accounting

The objectives of accounting include:

• Identification and recording of financial transactions; 
• Classifying and summarizing;
• Reporting and interpreting;
• Business decision guidance;
• Tax preparation and filing;
• Understanding of financial health;
• Management of cash flow;
• The measure of performance;
• Financial budgeting and planning;
• Economic data recording;
• Control over fraud and risk;
• Compliance with legal regulations;
• To estimate and ascertain profits and losses;
• Auditing of financial report.

So, there are many objectives in accounting to be considered. However, in this article, we will only address the three main objectives of accounting:

1. Identification and Recording Of Financial Transactions

Identification and recording is a major objective in accounting. It involves taking records of all the company’s financial information in a structured manner. This always comes in handy when a company needs to make decisions or evaluate growth and performance. Recording is always done in an accounting book.

2. Classifying and Summarizing

Ultimately, all recorded transactions are classified and summarized into different categories for companies to analyze and evaluate. Financial l transactions are classified into assets, expenses, revenues, and liabilities. This way, it is easy to comprehend the financial information. 

3. Reporting and Interpreting

The main objective of accounting is to ensure that all business stakeholders understand and have a clear picture of what’s going on regarding their input. Reporting and interpreting provide transparency to the management, investors, and even creditors. This relevant information guides the company into a better planning system and execution.

The Three Primary Branches of Accounting

The branches of accounting include but are not limited to:

• Financial Accounting;
• Managerial Accounting;
• Auditing;
• Cost accounting;
• Tax accounting;
• Project accounting;
• Forensic Accounting;
• Fiduciary accounting;
• Fund accounting;
• Political campaign accounting;
• Government Accounting;
• International Accounting.

Accounting is divided into three primary branches, all of which play different roles but come together to manage the complexity of business operations. The branches of accounting include financial, managerial, and tax accounting. 

1. Financial Accounting

Financial accounting is a branch of accounting that deals with preparing, classifying, and presenting a company’s financial statement. This finance all statement provides an insight into the performance of the company, organization, or brands to their stakeholders, creditors, regulators, and investors. The financial statement provided usually includes an income statement, a balance sheet, and a cash flow statement. 

A balance sheet, income statement, and cash flow statement are three key financial statements used to assess a business’s financial health and performance. Each statement provides different insights into the company’s financial activities and position:

• Balance Sheet:  A balance sheet is a financial statement of position. It shows a picture of what the company owns, its debts, and shareholders’ equity. 
• Income statement: An income statement is a profit and loss financial statement; it summarizes the revenue of a company and the cost used to generate that revenue. 
• Cash Flow Statement: A cash flow statement shows all the cash inflow and outflow from all the company’s activities, called cash net flow. This statement helps companies evaluate their financial performance and ability to generate funds.   

Together, income statements, cash flow statements, and balance sheets provide a clear picture of a company’s financial ability, position, and financial health. 

2. Managerial Accounting

Managerial accounting is also referred to as management accounting. This branch of accounting helps the company manage its affairs. It provides reports, documents, and statements to help an organization or brand make critical business decisions. It’s safe to say that managerial accounting helps with internal management and shows an organization’s or brand’s growth. 

3. Tax Accounting

Tax accounting handles all the preparation and filling processes for tax returns and payments. Tax accounting ensures your business meets all tax laws and regulations and minimizes liability. 

Cost Accounting vs Financial Accounting: What’s the Difference

Cost accounting and financial accounting are two unique branches of accounting that serve different purposes. Below, we share the key differences between both branches of accounting: 

1. Definition of accounting

Cost accounting is a system that accounts for all costs incurred in all business productions and transactions; cost accounting determines and controls cost, which includes selling price, project plans, and actions.  Financial accounting records all financial statements and captures the financial health of a business.

2. Information

In cost accounting, detailed information on all production costs, materials, labor, etc., is provided. Financial accounting provides financial statements, including balance sheets, cash flow sheets, and income statements.

3. Purpose

Cost accounting helps businesses and brands know the cost of producing goods and services. Financial accounting, on the other hand, provides a clear picture of a business’s performance and financial growth. 

4. Focus and Audience 

Cost accounting is focused on the internal management of every business. Financial accounting focuses on your business’s external aspects: your stakeholders, creditors, and investors. It aims to give a transparent overview of your financial performance and situation. 

5. Reporting 

The reports generated in cost accounting are used for internal management. Financial accounting reports are transparent and access financial growth and performance.

6. Cost Used For Recording

Cost accounting considers historical and predetermined costs. Financial accounting uses just historical costs for their financial statement.

7. Time of Report

Cost accounting is reported more frequently. Financial accounting is usually reported at the end of an accounting period, which is normally done annually. 

8. Profit Analysis

In cost accounting, the profit evaluated covers only a product. In financial accounting, the profits are evaluated together for the total entity.

9. Forecasting

Another difference between cost accounting and financial accounting is that cost accounting forecasting is possible. Forecasting is impossible. 

An Overview of Corporate Accounting and Its Role 

Corporate accounting can be defined as the process of creating a system that is used for the recording and analysis of the financial status and transactions of a business. It is the branch of accounting that is concerned with the preparation and consolidation of general ledgers and financial statements. It is tasked with accounting for a company’s finances through the use of the corporation’s private accountants.

Corporate accounting also notes the company’s day-to-day expenses, including but not limited to income statements, cash flow statements, and financial accounts. As an integral part of the business world, the importance of an aspect of accounting that deals with businesses can not be overemphasized. This is because if there is an error in the accounting aspect of a business, the business goes bankrupt.

Hence, there is a need for this overview of corporate accounting. The roles of corporate accounting are: 

• To Verify The Financial Status

Since accounting deals mostly with the income and expenditure of a business, that means that to be sure your business is thriving, you have to know your cash inflow and outflow.

• To Ascertain Profit

Certain small businesses end up going under because they are trying to cut costs by failing to hire a corporate accountant, which, though a short-term fix, is deadly in the long run. This is why ensuring the business is turning a profit is essential because, without it, the business is going under sooner rather than later.

• Identification and Recording of Transactions

Nothing puts a business under quicker than the opacity of transactions. This is why tracing the movement of cash into and out of business is paramount. It also prevents company theft, as every cash spent or received can be traced to a source.

• Accounting Provides Better Control

Knowing a business’s financial state helps protect the business from being swallowed in a hostile takeover. Due to the fact that a hostile takeover is often birthed from a lack of proper accounting in the business, good accounting gives the business shareholders better control of their business. Also, it presents the business as one to be trusted by potential investors.

Corporate accounting plays a significant role in the effective running of a business because if there is a lack of transparency in the expenses and income of the business, the business is either overtaken in a takeover or sued for misconduct, leading to the partners and shareholders losing trust in the business. 

Hence, corporate accounting fulfills two major roles in a company. These roles are: 

1. Budget Preparation

Every company wants to ensure they meet their financial goals at the end of every fiscal year, which helps them prepare a budget that contains expenditures, expected income, and outstanding debt from the last year. Corporate accounting helps these firms achieve this as they can ascertain how much is in the business and how much to allocate to every department in the firm so that each department has enough money to cover its operational expenses. 

Corporate accounting also runs internal audits in the company to be sure that every sector in the firm sticks to its financial budget and achieves the financial goals for the upcoming fiscal year. The company executives then veto the budget before passing it to their subordinates.

2. Financial Statement and Ledger Preparation

Corporate accounting deals with generating financial statements not just for external use or audits but is also used to checkmate every department in the firm that is meeting their financial goals for the fiscal year. These statements also help the shareholders track how their money is spent in the firm’s running. A ledger contains a collection of entries that simply show how much money is entering a business and how much is leaving the business.

This helps the business know the health of their business, and as such, helps them plan other areas of their business accordingly to ensure that the business is not losing more than it is gaining daily. This helps the business’s shareholders make informed decisions about their expenditures and income and shows the potential investors that the business is credible. It also prevents waste from several sectors in the firm. It helps to keep the extravagant spenders in the firm in check as their expenses are monitored carefully to ascertain they are not losing money for the business. 

This kind of accounting helps employees remain focused on the goal and helps them realize they have an active role to play in the success of the business instead of leaving the job for the higher-ups and slacking off because their money was not used to start up the business. Investors are more motivated to put their money into the business because of the book’s transparency, helping them see clearly where their money is going and how it is being spent. It helps the shareholders to know whether their company is growing or whether they’re better off letting themselves be bought out.

Conclusion

Accounting is the bedrock of a brand’s financial management, decision-making, and risk management strategies. It plays a pivotal role in ensuring that every penny can be accounted for and track every lost fund. It’s safe to say that accounting helps with the strategic planning and administration of every brand and organization. 

So, accounting controls the function of the markets and allows both internal and external sole members of a business to make informed choices that can fuel economic growth and innovation.