Fundamentals of Accounting and Auditing

Introduction to Branches of Accounting

• Accounting extends beyond computing expenses and profit, playing crucial roles in various sectors including not-for-profit, governmental, and academic institutions.
• This lesson covers the different branches of accounting, their functions, the services they provide, and the career opportunities in the accounting profession.

Learning Objectives

• Define the different branches of accounting.
• Differentiate the branches of accounting.
• Explain the importance of the services offered.

Commission on Audit (COA)

• COA is a government agency mandated by the constitution to investigate and check how other government agencies spend their allocated funds.
• COA's releases annual reports on government spending, initially giving agencies time to explain findings before making the reports public.

Basics of Accounting

• Accounting involves identifying, analyzing, recording, or journalizing, and communicating economic information for informed decision-making.
• Accounting is necessary for individuals, businesses, governments, and organizations dealing with financial transactions.
• Accounting requires analytical and decision-making skills, not just mathematical ability, to provide solutions to diverse organizational needs.

Essential Branches of Accounting

• The accounting profession has at least eight branches that offer unique services.

Financial Accounting

• Concerned with preparing annual financial reports for external users like investors, creditors, stockholders, government agencies, and the general public.
• Financial reports, or financial statements, adhere to generally accepted principles or standards, for example, Philippine Financial Reporting Standards (PFRS).
• PFRS, the financial accounting standard in the Philippines, adheres to the International Financial Reporting Standards (IFRS).
• Standards ensure financial statements' consistency and comparability across industries and localities.
• Financial accounting informs investors, creditors, and stock brokers for comparative performance analysis and investment decisions.

Management Accounting

• Focuses on preparing, analyzing, & communicating accounting information to internal users.
• Aims to aid business stakeholders in making well-informed decisions on daily operations and company direction.
• Unlike financial accounting, management accounting does not need to strictly follow PFRS, as it caters to internal needs.
• Management accounting answers questions on financial performance, expense reduction, sales projections, and impact of business decisions.
• Management accounting information is shared through periodic or on-demand management reports.

Cost Accounting

• Records and analyzes information on the costs of producing goods or services, including the object and driver of costs, direct and indirect costs, and fixed and variable costs.
• Cost accounting aids in setting fair selling prices and informs management of production cost differences due to changes in machinery, materials, or labor.
• It is a hybrid of financial and management accounting, determining production cost for both price decisions in management accounting and cost of goods sold in financial statements.
• Cost accounting is considered a sub-branch of management accounting due to its greater contribution to that area.

Government Accounting

• Government accounting manages the apportionment and spending of government financial resources.
• Preparing and analyzing financial reports show fund sources and expenditures.
• The information is valuable for government officials, oversight committees, employees, and citizens.
• Provides insights into budget alignment and adherence to state priorities, standards, and laws.
• Three agencies involved in government accounting are the Department of Budget Management, the Bureau of Treasury and the COA.

Auditing

• Auditing verifies the correctness of financial reports.
• This process determines if the information in the financial report is truthful and without errors.
• Auditing includes unbiased evaluation and opinion based on established benchmarks.
• Auditing builds credibility for businesses and organizations.
• Professionals may perform auditing from inside or outside an organization.
• External auditing ensures financial reports reflect fairness, with internal auditing checking records and finding operational inefficiencies.

Tax Accounting

• Encompasses all aspects of tax payment, including income tax calculation, tax returns, tax decision impacts, legal tax minimization, and tax-related matters.
• Tax accounting adheres to the National Internal Revenue Code (NIRC).
• The Tax Reform for Acceleration and Inclusion (TRAIN) Act amended the NIRC in 2017, followed by other reforms.
• Tax avoidance, or legal tax reduction, is permissible.
• Tax evasion, or income omission and non-payment, is illegal and punishable.

Bureau of Internal Revenue (BIR)

• BIR is a government agency under the Department of Finance.
• BIR collects taxes and imposes fines for non-compliance.

Accounting Education

• Involves developing appropriate curricula to equip accounting aspirants with the necessary knowledge and skills.
• Accounting experts can teach or encourage students to pursue accounting careers.

Accounting Research

• Accounting research pursues current and relevant information.
• Accounting research helps clients solve business problems.
• Accounting research assists regulatory bodies by amending principles or standards, and addressing new issues.

Case Study: BIR vs Social Media Influencers

• In August 2021, the BIR issued a Revenue Memorandum Circular (RMC) No. 97-2021.
• The RMC addressed the issue that social media influencers were not paying taxes.
• The memorandum was issued to remind social media influencers of their tax obligations and the penalties they could face.
• Tax accounting plays a key part as it focuses on individuals accurately complying with the country's tax code.

Keep in Mind

• Accounting provides financial information for informed decisions.
• Accounting branches address diverse organizational needs.
• Each branch varies by purpose and intended user.