Session 3 - Bases and Branches of Accounting

Practice/Practical/Practicum Session Plan : Bases and Branches of Accounting 

Introduction (5 min): Define bases and branches of accounting, highlighting their role in financial reporting.

Bases of Accounting (10 min): Explain Cash Basis and Accrual Basis with examples.

Comparison of Bases (5 min): Discuss differences, advantages, and limitations.

Branches of Accounting (15 min): Cover Financial, Cost, Management, Tax, and Forensic Accounting with applications.

Discussion & Q/A (10 min): Interactive recap with case-based examples and student queries.

Instruction for Practice/Practical/Practicum : (PDF, PPT)

Bases_and_Branches_of_Accounting.pptx 

Practice Material (IV Quadrant Approach)

(Q1) : Practice Questions/Problems (PDF Formats)

Bases and Branches of Accounting

A. BASES OF ACCOUNTING

The bases of accounting refer to the timing of recognition of revenues and expenses in the books of accounts. There are mainly two bases:

1. Cash Basis of Accounting

• Revenues and expenses are recorded only when cash is received or paid.

• Ignores accounts receivable/payable.

• Commonly used by small businesses or individuals for simplicity.

Example: Sale made in January but money received in February is recorded in February.

• A service rendered in June is paid for in July.

  • Under cash basis, revenue is recorded in July.

Features:

• Simple and easy to maintain

• Not accepted under GAAP/Companies Act

• Useful for small businesses and individuals

2. Accrual Basis of Accounting

• Income is recorded when earned, even if cash is not received.

• Expenses are recorded when incurred, even if cash is not paid.

• Revenues and expenses are recorded when they are earned or incurred, regardless of cash movement.

• Required by most accounting standards (GAAP, IFRS).

Example: Sale made in January is recorded in January, even if payment comes in February.

• A service rendered in June is paid for in July.

  • Under accrual basis, revenue is recorded in June.

Features:

• Follows Matching Concept

• Provides true financial position

• Mandatory for most businesses under law

Basic Accounting Principles

1. Accrual Principle – Record revenues and expenses when they are incurred, not when cash is exchanged.

2. Consistency Principle – Use the same accounting methods over time.

3. Going Concern Principle – Assume the business will continue operating in the foreseeable future.

4. Matching Principle – Match revenues with related expenses in the same period.

5. Conservatism Principle – Choose solutions that result in lower profits until more certainty is available.

Accounting Concepts (Fundamental Assumptions)

1. Business Entity Concept

• Business and owner are treated as separate legal entities.

Example:
Capital invested by the owner is recorded as a liability of the business.

2. Money Measurement Concept

• Only transactions measurable in monetary terms are recorded.

Example:
Employee satisfaction is not recorded in the books, but salaries paid are.

3. Going Concern Concept

• Business is assumed to continue indefinitely unless stated otherwise.

Example:
Assets are recorded at cost, not liquidation value.

4. Cost Concept

• Assets are recorded at their original purchase price, not market value.

Example:
A building purchased for ₹10,00,000 is recorded at that value, even if its market value rises to ₹15,00,000.

5. Accounting Period Concept

• Financial results are reported for a specific time period, typically a year.

Example:
Income and expenses are calculated for the year April 1, 2024 – March 31, 2025.

6. Matching Concept

• Revenues and related expenses should be matched in the same period.

Example:
If rent is paid in advance, only the part related to the current year is treated as an expense.

7. Accrual Concept

• Transactions are recorded when they occur, not when cash is received or paid.

Example:
Salary due but unpaid at year-end is still recorded as an expense.

B. BRANCHES OF ACCOUNTING

Branches of accounting are specialized areas developed to cater to different aspects of business activities.

1. Financial Accounting

• Purpose: To provide financial information to external stakeholders.

• Key Outputs: Balance Sheet, Income Statement, Cash Flow Statement.

• Standards: Governed by GAAP or IFRS.

• Deals with the recording and summarizing of transactions

• Prepares financial statements like Profit & Loss and Balance Sheet

• For external users: investors, banks, regulators, creditors.

2. Cost Accounting

• Purpose: To track, record, and analyze costs associated with production or operations.

• Key Areas: Direct and indirect costs, fixed and variable costs.

• Application: Useful for pricing, budgeting, and cost control.

• Helps determine the cost of products/services

• Aids in cost control and efficiency

• Used for internal management decision-making

3. Management Accounting

• Purpose: To provide internal management with information for planning, decision-making, and control.

• Key Outputs: Budgets, cost analyses, performance reports.

• Focus: Future-oriented, internal use.

• Provides relevant information to managers

• Helps in planning, controlling, and decision-making

• Includes budgeting, forecasting, performance evaluation

4. Tax Accounting

• Purpose: To ensure compliance with tax laws and regulations.

• Key Tasks: Preparing tax returns, tax planning, calculating tax liabilities.

• Standards: Governed by tax laws, not GAAP/IFRS.

• Focuses on tax-related matters

• Ensures compliance with tax laws

• Involves preparation of income tax returns, GST filings, etc.

5. Auditing

• Purpose: To verify the accuracy and fairness of financial statements.

• Types: Internal audit, external audit.

• Regulation: Conducted according to auditing standards (e.g., ISA).

6. Forensic Accounting

• Purpose: To investigate financial fraud, financial crimes and disputes.

• Application: Used in legal cases, fraud detection, litigation support, disputes, and court cases

• Combines accounting, auditing, and investigative skills

7. Government Accounting

• Purpose: To manage and report public funds.

• Standards: Uses special frameworks like GASB in the U.S.

• Focus: Accountability over profitability.

8. Nonprofit Accounting

• Purpose: To track and report finances in nonprofits.

• Focus: Fund accounting, donor restrictions, grants.

9. Social Responsibility Accounting

• Measures impact of business on society and environment

• Reports on CSR (Corporate Social Responsibility) activities

• Includes environmental costs and social performance metrics

Quiz – Test Your Knowledge

Q1. Which branch of accounting helps determine the cost of production?
A) Financial Accounting
B) Cost Accounting ✅
C) Tax Accounting
D) Social Accounting

Q2. Which base of accounting is used to record income only when received?
A) Accrual
B) Cash ✅
C) Dual
D) None

Q3. Who are the users of financial accounting?
A) Managers
B) Government & Investors ✅
C) Internal Staff
D) Factory Workers

(Q2) : Video Based Content (Youtube): www.youtube.com/watch?v=RtC1f29mEKM 

(Q3) : Formative Assessment (Google Form/Any Other Online Quiz Platform): forms.fillout.com/t/e6mnhLxEnwus