As there are many branches in a tree which all are different but they are part of a tree, in the same way there are 3 branches in accounting which are different but they are part of accounting. These three branches of accounting are financial accounting, management accounting and cost accounting. Let’s look at these branches one by one
1. Financial Accounting – Financial accounting is that branch of accountancy which is concerned with preparation of financial statements like balance sheet and profit and loss account for the external parties. Financial accounting records those transactions which have already happened, in other words it is historic in nature. Financial accounting forms the basis of management accounting as management accounting uses the information from financial accounting.
2. Management Accounting – This branch of accounting has evolved only few years back, it refers to the use of accounting information for the benefit of the internal parties like managers and owners of the company so that they can make decisions related to company effectively and efficiently. Management accounting is forward looking because it is used by the management to make decisions related to future. Management accounting is flexible as it does not have to comply with generally acceptable accounting principles because it is for internal use only and it is not published like financial accounting statements.
3. Cost Accounting – Cost accounting is that branch of accounting which helps the company in determining the cost of the product or service which is manufactured by the company. Cost accounting is also a means by which company can exercise control over the cost of a product, because using cost accounting one can predetermine the price of a product and once the product is manufactured company can match actual cost and predetermined cost and find out the reasons for any divergence between the two.
As one can see from the above that though all 3 branches of accounting are different but all of them are interlinked and equally important for a company and therefore any company cannot afford to choose between any one of them rather they are used in combination by almost all the companies around the world.