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Fundamentals of Financial and Cost Accounting · Accounting Principles, Concepts and Conventions

Meaning and Scope of Accounting for CMA Foundation

Updated 10 October 2026 · Fact-checked

Accounting is the process of identifying, recording, classifying, summarising and interpreting financial transactions so that users can take decisions. Its scope covers financial accounting, cost accounting and management accounting. To solve questions, match the user, the purpose or the branch to the keyword in the option.

Understand Meaning and Scope of Accounting

Every business earns, spends, owes and owns. If nobody records these facts, the owner cannot know whether the business is making a profit. Accounting is the system that records these facts in an orderly way and turns them into useful information.

Accounting works in stages. You identify transactions that can be measured in money. You record them in books. You classify them into groups such as sales, rent or capital. You summarise them into statements like the Profit and Loss Account and Balance Sheet. Then you analyse and interpret the results for users. Only transactions measurable in money are recorded.

The main objectives of accounting are:
- Keeping systematic records of transactions.
- Finding the profit or loss for a period.
- Showing the financial position (assets and liabilities) on a date.
- Providing information to users for decisions.
- Helping to meet legal needs such as tax and company law.

Users of accounting information are of two kinds. Internal users are owners, managers and employees. External users are investors, lenders and banks, suppliers, customers, the government and tax authorities, and the public. A lender wants to know if the business can repay. A supplier wants to know if it will be paid. The tax department wants to know taxable income.

Accounting has three main branches. Financial accounting records transactions and prepares final statements for the outside world. Cost accounting records and analyses the cost of products, jobs or services to control and reduce cost. Management accounting uses financial and cost data to help managers plan, control and decide, for example through budgets and marginal costing.

Key formulas to remember

Stages of accounting
Identify → Record → Classify → Summarise → Analyse and Interpret → Communicate
Questions often ask which stage an activity belongs to. Preparing the Balance Sheet is summarising.
Profit or loss from accounts
Profit = Income − Expenses (for the period)
Finding profit or loss is a core objective of financial accounting.
Financial position
Assets = Capital + Liabilities
The Balance Sheet shows this position on a particular date.
Branch and main purpose
Financial → reporting to outsiders; Cost → ascertaining and controlling cost; Management → decision-making and planning
Use this as a quick match for branch-based MCQs.

How to solve Meaning and Scope of Accounting questions

Use this method for any MCQ on meaning, objectives, users or branches of accounting.

  1. 1Read the question and mark the keyword: meaning, objective, user, branch, internal or external.
  2. 2Decide what is being asked: a definition, a purpose, a person or a branch.
  3. 3If it is about a user, ask what that person wants to know, such as repayment ability, profit or tax.
  4. 4If it is about a branch, ask who uses the information and for what: outsiders for reporting, managers for decisions, or cost control.
  5. 5Check whether the item is measurable in money. If not, it is not recorded.
  6. 6Eliminate options with absolute words like only or never, or options that mix up branches.
  7. 7Pick the option that matches the keyword most completely.

Quickest way: Keyword matching

When to use it: Use it for one-line MCQs on users, objectives and branches when time is short.

  1. Link record and final statements to financial accounting.
  2. Link cost per unit, cost control and cost reduction to cost accounting.
  3. Link planning, budgets and decisions to management accounting.
  4. Link lenders, banks and suppliers to external users, and managers to internal users.
  5. Reject any option that gives a purpose to the wrong branch.

Common mistakes in Meaning and Scope of Accounting

  • Treating accounting as only bookkeeping.

    Recording is the most visible part of accounting.

    Fix: Remember that bookkeeping is only recording. Accounting also classifies, summarises and interprets.

  • Calling managers external users.

    Students think any user who takes decisions is outside the business.

    Fix: Managers, owners and employees are internal users. Investors, lenders, government and the public are external.

  • Saying financial accounting is mainly for cost control.

    Both branches deal with money and expenses.

    Fix: Cost control is the job of cost accounting. Financial accounting reports profit and position.

  • Believing all events are recorded.

    Students forget the money measurement limit.

    Fix: Only transactions that can be expressed in money are recorded. Staff skill or a good reputation is not recorded.

  • Confusing cost accounting with management accounting.

    Both help managers and use cost data.

    Fix: Cost accounting focuses on cost ascertainment and control. Management accounting is wider and uses all data for planning and decisions.

Worked examples

Example 1

A bank is considering a loan to Sharma Traders. The bank studies the firm's Balance Sheet to see whether it can repay. Which user is the bank, and what does it want to know?
A) Internal user, to find production cost
B) External user, to judge repayment ability
C) Internal user, to plan budgets
D) External user, to compute income tax

Show the solution
  1. The bank is outside the business, so it is an external user.
  2. A lender gives money and wants it back with interest.
  3. So it studies financial position to judge repayment ability.
  4. Options A and C call it internal, so they are wrong. Option D gives the tax authority's purpose.

Answer: B) External user, to judge repayment ability

Example 2

Mehta Industries wants to find the cost of making one unit of its product and reduce wasteful spending. Which branch of accounting mainly serves this need?
A) Financial accounting
B) Cost accounting
C) Auditing
D) Social accounting

Show the solution
  1. The keywords are cost of one unit and reducing wasteful spending.
  2. Finding and controlling cost is the main aim of cost accounting.
  3. Financial accounting reports profit and position to outsiders, so A does not fit.
  4. Auditing checks records and social accounting deals with social impact, so C and D do not fit.

Answer: B) Cost accounting

Exam tips

  • Questions are usually direct and one-line, so learn the keyword for each branch and user.
  • Expect match-the-user questions: lender, supplier, tax authority, investor, employee.
  • Watch for options that look right but give a purpose to the wrong branch.
  • Learn the difference between financial and cost accounting as a short list, since it is a frequent theme.
  • There is no negative marking, so attempt every question.

Practice questions from Accounting Principles, Concepts and Conventions

Meaning and Scope of Accounting in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Meaning and Scope of Accounting: frequently asked questions

What is the meaning of accounting in simple words?

Accounting is recording, classifying and summarising money-related transactions of a business and interpreting the results. It tells you profit or loss and the financial position. Users then take decisions from this information.

Who are the users of accounting information?

Internal users are owners, managers and employees. External users are investors, lenders, suppliers, customers, government and tax authorities, and the public. Each looks for different information.

What is the difference between financial accounting and cost accounting?

Financial accounting records all transactions and prepares final statements mainly for outsiders. Cost accounting records and analyses the cost of products or services to control and reduce cost. Cost accounting is mainly for internal management.

What are the branches of accounting?

The main branches are financial accounting, cost accounting and management accounting. Financial accounting reports results, cost accounting handles cost, and management accounting supports planning and decisions.