Fundamentals of Accountancy, Business, and Management 1 PDF

Unit 1: Introduction to Accounting Lesson 1.2 Branches of Accounting Contents Introduction 1 Learning Objectives 2 Quick Look 2 Learn the Basics 3 Financial Accounting 5...

Unit 1: Introduction to Accounting Lesson 1.2 Branches of Accounting Contents Introduction 1 Learning Objectives 2 Quick Look 2 Learn the Basics 3 Financial Accounting 5 Management Accounting 5 Cost Accounting 6 Government Accounting 6 Auditing 7 Tax Accounting 8 Accounting Education 9 Accounting Research 9 Case Study 10 Keep in Mind 10 Try This 11 Practice Your Skills 13 Challenge Yourself 15 Photo Credit 16 Bibliography 17 Unit 1: Introduction to Accounting Lesson 1.2 Branches of Accounting Introduction When people hear the word accounting, one would think that it is only concerned with computing the expenses and profit of a business. However, the practice of accounting extends beyond that. Professional accountants perform crucial roles even in the not-for-profit sectors. Governments, nongovernmental institutions, professional bodies, academe, and other institutions also seek the services of accountants to perform their mission and achieve their goals. In this lesson, you will learn about the different branches of accounting, their functions and the services they provide. You will also gain insights into the different career opportunities and job descriptions that are possible in the accounting profession. 1.2. Branches of Accounting 1 Unit 1: Introduction to Accounting Learning Objectives DepEd Competencies At the end of this lesson, you should be able to Differentiate the branches of accounting do the following: (ABM_FABM11-IIIa-5). Define the different branches of Explain the kind or type of services rendered in each of these branches accounting. (ABM_FABM11-IIIa-6). Differentiate the branches of accounting. Explain the importance of the services offered by the different branches of accounting. Quick Look Commission on Audit and the Philippine Government The Commission on Audit (COA) is a government agency mandated by the Philippine Constitution to investigate and check how other government agencies spend their allocated funds. Its vision is to become “a trustworthy, respected and independent audit institution that is an enabling partner of the government in ensuring a better life for every Filipino.” It aims to achieve this by performing its mission of ensuring accountability for public resources, promoting transparency, and helping improve government operations, in partnership with stakeholders, for the benefit of the Filipino people. Every year, the COA releases reports on how government funds are spent. Initially, these reports are sent privately to the different government agencies to give the latter time to explain the findings. Then these reports, together with the explanation of the government agencies, are made available to the public. 1.2. Branches of Accounting 2 Unit 1: Introduction to Accounting Questions to Ponder 1. What is the importance of the COA to the government? __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ 2. Why is accounting important for the COA to perform its mandate? __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ 3. How can citizens use the information released by the COA? __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ Learn the Basics Accounting is the process of identifying and analyzing, recording or journalizing, and communicating economic information to permit informed judgment and decision by users of the information (AAA, 1966). This process is necessary for individuals, businesses, governments, and other organizations dealing with financial transactions. However, most people would often relate accounting with simply calculating revenues and costs. You may have heard the common notion that you should be an accountant if you are good at Math. In reality, accounting has a very broad scope, and it requires other skills beyond performing mathematical operations. The practice of accounting requires good analytical and decision-making skills to provide the best solutions to the diverse needs of an organization or business entity. 1.2. Branches of Accounting 3 Unit 1: Introduction to Accounting To illustrate the broad set of skills required in the practice of accounting, this lesson will discuss the branches of accounting. You will learn that each branch offers a distinct set of services and uses specific instruments to address the varying needs of businesses and organizations. Essential Question Can businesses and institutions function efficiently without the services offered by accounting branches? The accounting profession has at least eight branches that signify the unique services each one offers. Professional accountants could pursue a career in these specialized fields. The eight branches of accounting are shown in Figure 1. Figure 1. The accounting field has eight branches that offer different services to businesses and organizations. 1.2. Branches of Accounting 4 Unit 1: Introduction to Accounting Financial Accounting This branch of accounting is concerned with preparing financial reports at least once a year to be presented to external users of accounting information, such as potential investors, creditors, stockholders, government agencies, and the general public. These financial reports, also called financial statements, follow the generally accepted principles or standards set by accounting regulatory bodies. The Philippine Financial Reporting Standards (PFRS), the financial accounting standard followed in the Philippines, adheres to the International Financial Reporting Standards (IFRS). These accounting standards are set to ensure consistency and comparability of financial statements, regardless of the locality or the type of industry. For instance, a creditor who is not familiar with a specific industry (e.g. mobile gaming) could still assess the risks associated with providing debt to a company in that sector (e.g. mobile game development company) because its financial statements follow the generally accepted accounting standards. Through the information provided by financial accounting, investors, creditors, stock brokers, and other concerned parties can also compare the performance of businesses (e.g., small and big companies, start-up and established firms) and decide where to invest, buy stocks, or lend money to. Management Accounting This branch of accounting is related to preparing, analyzing, and communicating accounting information to the internal users or people working within an organization, i.e., the owners, management, and employees. Management accounting aims to help business stakeholders make informed decisions concerning their day-to-day operations as well as the general direction of the company. It is important to note that since management accounting aims to meet the needs of internal users, it does not need to follow the PFRS. How is the business or organization performing financially? What expenses can be cut? What is the projection of sales for a product or service? Did a particular business decision have a positive or negative impact on a company’s financial performance? These are some of the questions that can be answered through the practice of management accounting. The pieces of information from management accounting are communicated through management reports which could be released periodically or as required by the management. These reports are more useful when released frequently (e.g., monthly and quarterly, rather than yearly). 1.2. Branches of Accounting 5 Unit 1: Introduction to Accounting Cost Accounting This branch of accounting records and analyzes the information related to the costs in producing goods or services, such as the object and driver of costs, direct and indirect costs, and fixed and variable costs. One example of cost accounting in a business is reviewing the cost of manufacturing goods or providing services to set a fair selling price. Also, this branch of accounting can inform the management of the difference in total production cost if new machines are purchased, if different materials are used, or if the company would employ less labor. Cost accounting provides information for both management and financial accounting that is useful in making decisions concerning the operations of a business or an organization. It may be considered a cross between financial and management accounting. For instance, cost accounting determines the production cost. It is used in management accounting to determine price decisions. On the other hand, it is used in financial accounting to determine the cost of goods sold and the ending inventory presented in the financial statements. However, cost accounting is more known to be a sub-branch of management accounting since it contributes more to that branch than financial accounting. Check Your Progress What are the similarities and differences between financial, management, and cost accounting? _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ Government Accounting This branch of accounting deals with how the government apportions and spends the financial resources allocated to them. Government accounting also involves preparing and analyzing financial reports that show where the government funds come from and how it is spent. 1.2. Branches of Accounting 6 Unit 1: Introduction to Accounting This branch of accounting provides information on the financial position and the operations of government agencies. The information in government accounting is useful both for internal users (i.e., government officials, oversight committees, employees) and external users (i.e., citizens). In the Philippines, government accounting could provide information on whether or not the disbursement of funds is aligned with the approved budget by Congress and whether or not it is utilized according to state priority, standards, and laws. Since government accounting is related to public governance, the information provided in this branch is useful in the checks and balances mechanism in the government. There are three main agencies involved in government accounting. These are the Department of Budget Management (prepares the budget), the Bureau of Treasury (disburses cash to the different government agencies), and the Commission on Audit (monitors the use and allocation of public funds). Figure 2. Three agencies are vital in the checks and balances mechanisms in the government. Auditing This branch of accounting deals with verifying the correctness of financial reports prepared by an organization. It is a process that determines whether or not the information stated in the financial report is truthful and without errors. Therefore, auditing includes an unbiased evaluation and opinion of the auditor based on established criteria. Auditing helps businesses and organizations develop their credibility in their fields. 1.2. Branches of Accounting 7 Unit 1: Introduction to Accounting Professionals may perform auditing from the inside or outside an organization. External auditing is performed by someone outside the reporting entity. It ensures that financial reports reflect fairness and compliance with the accounting standards. On the other hand, internal auditing is performed by someone who works for the reporting entity. It checks the validity of accounting records, discovers operational inefficiencies, and identifies weaknesses in the internal control measures. Tax Accounting This branch of accounting covers everything related to the payment of taxes: computing income tax and tax returns, assessing the repercussions of tax decisions, coming up with ways to minimize tax legally, and dealing with other tax-related matters. Tax accounting in the Philippines adheres to the National Internal Revenue Code (NIRC). In 2017, the Tax Reform for Acceleration and Inclusion (TRAIN) Act was signed into law; this amended the NIRC. Other reforms followed under the Comprehensive Tax Reform Program. Tax accounting may involve tax avoidance. Tax avoidance, or the process of reducing tax in compliance with tax laws, is a legitimate practice that organizations and businesses can perform. However, tax evasion, or the act of omitting sources of income on taxable transactions and the intentional non-payment of tax, is illegal and is an offense that may be punishable by imprisonment. Closer Look Bureau of Internal Revenue The Bureau of Internal Revenue, or BIR, is a government agency under the Department of Finance mandated by the Philippine constitution to collect taxes from individuals and businesses and impose fines or penalties when these individuals or companies fail to pay their tax. 1.2. Branches of Accounting 8 Unit 1: Introduction to Accounting Check Your Progress How can tax accounting be useful to businesses and organizations? _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ Accounting Education This branch of accounting involves the education sector in coming up with an appropriate curriculum to help aspiring accountants be equipped with relevant accounting knowledge and skills. Accounting practitioners can work as teachers or professors who can share their expertise in the accounting industry, encouraging students to seek a career in accounting. Accounting Research Accounting research centers on the pursuit of current and relevant information in the field of accounting. It can help a particular clientele solve problems concerning its business. It can benefit regulatory bodies by amending existing accounting principles or developing new accounting standards to address issues and trends in accounting in business. Check Your Progress Upon learning the different branches of accounting, what other skills should accountants have aside from performing mathematical equations? _________________________________________________________________________________ _________________________________________________________________________________ _________________________________________________________________________________ 1.2. Branches of Accounting 9 Unit 1: Introduction to Accounting Case Study BIR vs Social Media Influencers In August 2021, BIR issued a Revenue Memorandum Circular (RMC) No. 97-2021. The circular mentioned that the bureau received reports that social media influencers, despite their vast earnings, are not paying their taxes. There were also reports that though these influencers are registered with BIR, they register under a different line of business, and they do not declare their earnings from their social media platforms. Because of these reports, the memorandum was issued to remind the social media influencers of their tax obligations and the possible sanctions for their failure to meet these. In this situation, tax accounting is involved as this branch of accounting is concerned with the accurate compliance of individuals with the tax code implemented in the country. Keep in Mind Accounting is a process employed by individuals, organizations, institutions, and businesses. It provides the necessary financial information so that users can make informed judgments and decisions. Accounting has eight branches; each one serves different functions and addresses the varied needs of organizations. The branches of accounting are financial accounting, management accounting, cost accounting, government accounting, auditing, tax accounting, accounting education, and accounting research. Each branch of accounting differs in terms of purpose and intended user of its services. 1.2. Branches of Accounting 10 Unit 1: Introduction to Accounting Try This A. Completion. Choose the correct word from the given options and fill in the blanks. ________________ 1. Cost accounting is a sub-branch of ________ (tax, management) accounting. ________________ 2. External auditing is performed by someone ________ (inside, outside) the business. 1.2. Branches of Accounting 11 Unit 1: Introduction to Accounting ________________ 3. Financial accounting involves preparing ________ (financial statements, tax reports) for the external users of accounting information. ________________ 4. In accounting education, accounting practitioners can work as ________ (management, teachers) who can share their knowledge to accounting students. ________________ 5. Management accounting is concerned with preparing, analyzing, and presenting financial information to people working ________ (inside, outside) the reporting entity. B. Short-Answer Response. Identify the branch of accounting that addresses each question below. ________________ 1. How much tax should the business declare? ________________ 2. How should the government funds be allocated? ________________ 3. Does the business have enough resources to open another branch? ________________ 4. How much should the selling price of a product be? ________________ 5. Are the financial reports supported by verifiable evidence? C. Modified True or False. Write true if the statement is correct. Otherwise, correct the statement by replacing the underlined word or phrase to make the statement true. ________________ 1. Financial accounting adheres to the PFRS, while tax accounting adheres to the NIRC. ________________ 2. Management accounting helps external users make informed decisions concerning the direction of the company. 1.2. Branches of Accounting 12 Unit 1: Introduction to Accounting ________________ 3. Cost accounting can be useful with decisions concerning the financial position of the business. ________________ 4. Accounting research helps regulatory bodies develop accounting records to address issues in accounting practices. ________________ 5. Auditing is concerned with verifying the accuracy of accounting records. Practice Your Skills Directions: 1. Complete the table that summarizes the output and the user of accounting information for each branch. 2. On the output column, choose from the choices provided (you may repeat some answers). 3. On the use of the information column, identify the user of information and provide a sample situation wherein the accounting information would be helpful to the specified user. 4. The answers on some fields have been provided as reference. external users (government, creditors, tax reports financial statements stockholders) internal reports financial statements internal users (management) schools, educational business government institutions, government agencies, professional board accounting standards audit reports regulatory boards 1.2. Branches of Accounting 13 Unit 1: Introduction to Accounting public Accounting curriculum Output User of information and sample situation A business firm that would like to assess the new tax law's impact on its 1. Tax Accounting tax reports operation should use tax accounting services to produce its tax reports. Schools, educational institutions, and professional boards that would like to align the skills of ABM and Accountancy 2. Accounting accounting students with the developments in the Education curriculum field should consult with professionals in accounting education and develop their accounting curriculum. Regulatory boards should conduct accounting accounting research to ensure that their 3. Accounting Research standards accounting standards align with the field's developments and challenges. 4. Financial Accounting 1.2. Branches of Accounting 14 Unit 1: Introduction to Accounting 5. Management Accounting 6. Cost Accounting 7. Government Accounting 8. Auditing Challenge Yourself Answer the following questions: 1. Give one type of business and explain how it would benefit from cost accounting. Justify your answer by identifying the pieces of information that one would obtain 1.2. Branches of Accounting 15 Unit 1: Introduction to Accounting from cost accounting. __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ 2. Give a specific institution that would benefit from Accounting Education. Justify your answer by relating the institution’s mandate and the types of information produced in accounting education. __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ 3. Give an example of a research problem that could be addressed through accounting research. __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ __________________________________________________________________________________________ Photo Credit businessman illustration by Piqsels is licensed under Copyright-Only Dedication via Creative Commons. 1.2. Branches of Accounting 16 Unit 1: Introduction to Accounting Bibliography AAA. A Statement of Basic Accounting Theory. American Accounting Association, 1966. Bureau of Internal Revenue. "2021 Revenue Memorandum Circulars - Bureau of Internal Revenue." Accessed October 19, 2021. https://www.bir.gov.ph/index.php/revenue-issuances/revenue-memorandum-circula rs/2021-revenue-memorandum-circulars.html. Bureau of Internal Revenue. "BIR Mandate, Vision and Mission - Bureau of Internal Revenue." Accessed October 18, 2021. https://www.bir.gov.ph/index.php/philippine-transparency-seal/bir-mandate.html. Ballada, Win and Susan Ballada. Basic Financial Accounting and Reporting Made Easy. 23rd ed. Manila, Metro Manila: DomDane Publishers, 2021. Commission on Audit. "COA Constitutional Mandate." Accessed October 15, 2021. https://www.coa.gov.ph/index.php/2013-06-19-13-06-03/constitutional-mandate. Vera, Ben O. De. "BIR: Days of Tax-evading Social Media Influencers Are Numbered." INQUIRER.net. August 17, 2021. Accessed October 18, 2021. https://business.inquirer.net/329121/bir-days-of-tax-evading-social-media-influencer s-are-numbered. 1.2. Branches of Accounting 17