What are the Different Classifications of Accounting?
Accounting is a vast field of study that deals with money management. Naturally, there are different classifications made by experts. These classifications help students to cover the area adequately and learn the concepts clearly. Here are the details of the modern classification of accounts. Having explicit knowledge about it can help you cover the whole section.
There are mainly three subfields of accounting, such as Cost Accounting, Management Accounting, and Financial Accounting. All of these are discussed in detail.
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Cost Accounting
The type of accounting that deals with keeping records, analyzing, and summarizing the costs for a service product is known as cost accounting. An organization can access the classification of the expenses in cost accounting easily. Cost accounting can be vital for any company as it helps the executives observe the levels of costs in different production aspects and take necessary decisions. They take the help of some prominent elements such as labor, material, and miscellaneous expenses to calculate the total costs. Moreover, the above elements are costs for a company that can either be direct or indirect. The modern classification of accounts gives way to several kinds of costs.
Types of Costs and Their Details
Variable Cost: The quantitatively dynamic cost is also known as Variable Cost. Generally, it is directly proportional to production. Labor and Material costs are the two variable costs
Fixed Cost: The costs that are static in contrast to the level of production are known as fixed costs such as wages and salaries.
Semi-variable Cost: The cost which can be variable or fixed depending upon the element is known as semi-variable cost. There are two other costs known as Sunk cost and Opportunity Cost that are related to the production level and semi-variable cost.
Financial Accounting: As per the classification of accounting principles, Financial Accounting is another subtype of accounting. As it is evident by the name, it deals with the finances of the business company over a specific time period.
The document-based data that comes under financial accounting are income bills, statements, and balance sheets. The executives can derive reports related to company transactions from financial accounting. An executive has to follow financial principles to get reports of financial accounting. He has to follow the facts mentioned in GAAP to make the reports.
Multiple types of companies like International Public companies, International Financial Reporting, and others are all related to GAAP. The methodologies that the executives can follow are Cash Basis, Accrual Basis, and the hybrid between the two. The advantage of proper financial accounting in a company is that it can enhance complete transparency. Moreover, it can ease the process of making the annual reports too.
Management Accounting: The executive board of the organization fully manages management accounting. It relates to organizational decision-making in different aspects. It is mainly done based on the reports on cost accounting and financial accounting and other data. It holds an important place in the case of the classification of accounting.
Management Accounting Segregation
The details of the management account segregation are given below:
Cost Accounting Based
Analysis of the profit and cost volume.
Analysis of the standard costs and variance.
The method of differential and incremental costing
Financial Accounting based
Analysis of all the data present in the financial statements
Analysis of the cash flow statements
Analysis of the return on capital
Future Data Information Based: Segregation of management accounting through budget control and project evaluation.
Mathematics Based: Segregation with the help of operation research, network analysis, and linear programming.
Final Words: So these are the details about the classification of accounting. All large business companies hire the best team when it comes to accounting as the outcomes show the fields where the company investments are done already or may happen in the future.
Why is Accounting Important?
For running any business smoothly and efficiently one should maintain accounts. Accounting helps you to track income and expenditures and provides investors, administration, and government with quantitative financial information which can be used in making business.
The goal of accounting is to collect data and to prepare reports on financial statements, about the performance of the firm, whether it is running smoothly, its financial situation, and the cash flows of a business.
By taking all these things in consideration decisions are made for the progress of the firm. They not only help to manage the business of the firm but also to make future decisions like to invest more money in it or lend money etc.
Rules of Accounting
Accounts are of three types
Real Account:
In real account debit the items which come in credit what goes out.
Real accounts are examples of Assets of businesses like cash machinery buildings.
Personal Account:
In personal accounts, receivers are debited and givers are credited in the balance sheet.
An example of some personal accounts might be Preeti account Sharma account
Nominal Accounts:
In nominal accounts, all expenses and losses are debited and all incomes and gains are credited. The nominal accounts are applicable to the Income, losses, and profits of a firm.
For example salary, wages, purchases, sales, etc.
Need and Objectives of Accounting
To record transactions in a systematic manner.
Assessment of loss and profit of a firm.
Tax filing.
Providing important information to the administration.
Effective Control over the Business
How Can We Maintain a Daily Account Check at Home?
We can maintain accounts even at home.
Your expenditure or expenses should not be more than your income.
Your cash inflows should be high when compared to your expenses.
Always have an adequate balance in your accounts.
Keep vigilance on your expenses and cut down on unnecessary expenditure along with your actual income.
FAQs on Accounting Classifications: An Overview
1. What are the main branches or sub-fields of accounting?
Accounting is broadly classified into three main branches based on the information needs of different users:
- Financial Accounting: This involves recording, summarising, and reporting a company's business transactions through financial statements. Its main purpose is to provide information to external users like investors, creditors, and government agencies. It strictly follows standards like GAAP or IFRS.
- Cost Accounting: This branch focuses on determining and controlling the costs of products or services. It helps management in making decisions about pricing, cost reduction, and assessing the profitability of different operations.
- Management Accounting: This provides financial and non-financial information to a company's internal managers for decision-making, planning, and controlling business operations. It is future-oriented and does not have to follow set standards.
2. What are the traditional types of accounts as per the 'Golden Rules of Accounting'?
Traditionally, accounts are classified into three types, and each has a 'Golden Rule' for debit and credit:
- Real Accounts: These are accounts related to assets and properties. They can be tangible (e.g., Machinery, Cash) or intangible (e.g., Goodwill). The rule is: Debit what comes in, Credit what goes out.
- Personal Accounts: These accounts are related to persons, firms, companies, or institutions. Examples include a customer's account, a supplier's account, or a bank account. The rule is: Debit the receiver, Credit the giver.
- Nominal Accounts: These accounts are related to all expenses, losses, incomes, and gains. Examples include Salaries Account, Rent Account, and Sales Account. The rule is: Debit all expenses and losses, Credit all incomes and gains.
3. What is the key difference between Financial Accounting and Management Accounting?
The primary difference lies in their target audience and purpose. Financial Accounting is geared towards external users (like investors and creditors) and focuses on providing accurate, historical summaries of the company's performance, following strict regulations (GAAP/IFRS). In contrast, Management Accounting is for internal users (managers) to aid in future decision-making. It is flexible, forward-looking, and customised to the specific needs of the management.
4. How does classifying costs as fixed, variable, or semi-variable help a business?
This classification, central to Cost Accounting, is crucial for effective management. Fixed costs (e.g., rent) do not change with production levels, while variable costs (e.g., raw materials) do. Understanding this distinction helps a business in:
- Budgeting and Forecasting: Accurately predicting total costs at different levels of activity.
- Pricing Decisions: Ensuring prices cover both variable and a portion of fixed costs to be profitable.
- Break-Even Analysis: Calculating the sales volume needed to cover all costs.
- Performance Evaluation: Comparing actual costs against budgeted costs to identify inefficiencies.
5. Under which classification does a 'Bank Account' fall, and why?
A Bank Account is classified as a Personal Account. This is a common point of confusion, as it involves cash (a Real Account). However, the account represents the relationship with an institution—the bank. Since the bank is a legal entity (an artificial person), its account falls under the Personal Account category. The 'Golden Rule' applied is 'Debit the receiver, Credit the giver', reflecting transactions with the bank as an entity.
6. Can you provide some examples for each type of traditional account?
Certainly. Here are common examples for each classification:
- Real Accounts: Land, Building, Machinery, Furniture, Cash in Hand, Goodwill, Patents.
- Personal Accounts: Capital Account, Drawings Account, Bank Account, Accounts of customers (Debtors), Accounts of suppliers (Creditors).
- Nominal Accounts: Salaries Expense, Rent Paid, Commission Received, Sales Revenue, Purchase Expense, Interest Earned.
7. How do the traditional accounts (Real, Personal, Nominal) fit into modern financial statements?
The traditional classifications form the very foundation of modern financial statements. The relationship is as follows:
- All Real Accounts (assets) and Personal Accounts (representing liabilities, capital, and certain assets like debtors) are shown on the Balance Sheet.
- All Nominal Accounts (incomes, gains, expenses, losses) are compiled to prepare the Trading and Profit & Loss Account (or Income Statement). The final result of this statement (Net Profit or Net Loss) is then transferred to the Capital Account on the Balance Sheet.
