There are three different classes of accounting which are Financial Accounting, Cost Accounting, and Management Accounting. All three have their own characteristics and use. Further, they have different results as well as recording and maintenance. Let us understand elaborately the classification of accounting.
Classification Of Accounting
We can define financial accounting as a process of recording, summarizing, and reporting various transactions that occur over a period of time during the course of business.
In the preparation of the above, financial accounting uses a bunch of accounting principles. These contain different rules and assumption set out for the preparation of financial statements.
There are various different rules and regulations that financial accounting uses for the preparation and presentation of financial accounting.
In India, all financial accounts are prepared in accordance with Generally Accepted Accounting Principal (GAAP). In the case of International public companies, international financial reporting standard is applicable together with GAAP.
Further, there are two different methodology financial accounting uses to prepare financial statements:
- Accrual Basis
- Cash Basis
- Combination of both of above.
Accrual method entails recording transaction as and when the transaction occurs and revenue is recognizable or expenses are certain and payable. In the case of the cash method, we record transactions on the basis of the exchange of cash.
Learn more about Basic Assumption of Accounting here in detail.
Cost accounting is a process of recording, summarizing, analyzing, and allocating the cost over the process of manufacturing a product or providing services.
It helps management to determine the cost involved in manufacturing a product or services by use of different cost accounting method.
Further, it helps management to make organization cost-efficient and capable. Cost accounting acts as a controlling tool.
There are different elements of cost accounting like:
- Other expenses
Direct and indirect are the further segregation of the above costs.
Different Types of Cost
- Fixed Cost
- Variable Cost
- Semi-variable Cost
- Opportunity Cost
- Sunk Cost
Let us understand all types in detail:
- Fixed cost means cost does not vary with the quantity of production, like Salary or fixed wage.
- Variable cost varies with a change in the quantity of production like material cost and labor cost will increase with the increased level of production.
- Semi-Variable Cost contains two elements of costs one is fixed and another one is variable. In this type of cost fixed part remains the same up to a certain level of production but changes after crossing that certain level and variable varies with the changed level of production.
- Opportunity cost is the cost of not earning profit from the opportunity of manufacturing a new product and sale due to limited resources. Or we can say with the limited resources an organization has to forgo profit of the other product in addition to the existing.
- Sunk cost is the cost with cannot be recovered once occurred like for producing certain product machinery is required and purchased. Now, we cannot recover the cost of machinery whether we carry out production or not.
Management Accounting or Managerial Accounting helps managers to make and implement business policies for better results. They use financial accounting information for this purpose.
Management accounting is a different analysis tool for analyzing accounting information and to draw out best for the organization. Segregation of these tool under four heads according to their nature for the better understanding is as under:
1. Based on Financial Accounting Information
- Ratio analysis of financial information contained in financial statements.
- Comparative analysis of past and current financial information.
- Through an analysis of fund flow statements and cash flow statements.
- Analysis of Return on capital employed.
2. Based on Cost Accounting Information
- Cost volume and profit volume analysis.
- Incremental and differential costing method.
- Standard costing and variance analysis.
3. Based on Mathematics: Techniques like operation research, linear programming, network analysis etc.
4. Based on Future data information: Budget and budgetary control, budget variance analysis, business forecasting, project evaluation.
Thus using these tool manager decide best for the organization to make it cost-efficient and capable.
Solved Example for You
What are the different techniques of cost accounting?
The different techniques of cost accounting are:
- Marginal Costing: This technique checks the cost a firm has to incur for the production of additional units.
- Standard Costing: In this technique, the comparison of the predetermined cost of the production process is made with the cost of the same production process is to incur to bring cost effectiveness.
- Direct Costing: In this technique, we charge all the indirect costs to profit and loss account and charge only direct costs to the product.
- Historical Costing: As the name suggests Comparison of current cost with the Historical Cost.
- Uniform Costing: We follow the unique costing practices for the purpose of comparison.
- Absorption Costing: all cost in the process of manufacturing processing or projects are considered.