8 Types of Accounting You Should Know
Accounting isn’t just accounting, right? Actually, no. Accounting is a diverse field with many types of accounting. Accounting terms and available accounting systems.
You might be asking yourself why you should learn about accounting in general. You may find yourself using one or more of these types in the future. Take a moment to learn more about the different accounting fields.
8 Types of Accounting
Contrary to popular belief accountants do more than prepare taxes. Accountants are also able to investigate white-collar crime, audit businesses, and work only in government or manufacturing environments.
Accountants can become CPAs (Certified Public Accountants), or they can perform bookkeeping and accounting tasks, such as managing the accounting cycle for a small business or large corporation. They may also work for large consulting firms or nonprofits.
These are just a few of the many areas of accounting.
1. Financial Accounting
Financial accounting’s primary function is to record, track, and report on financial transactions. This can be done by creating financial statements.
These guidelines must be followed according to Generally Accepted Accounting Principles rules (GAAP). These rules were established by the Financial Accounting Standards Board. They are intended to encourage consistency in the reporting process. Company A will therefore use the same reporting method as Company B.
Financial accounting does not focus on the future, but only looks back at past performance.
Financial accounting, on the other hand, provides an accurate view of business performance over a specific period of time through financial statements. Statements are made available to investors and financial institutions.
Two types of financial accounting exist accrual and cash. Both accounting methods use double-entry accounting in order to accurately record financial transactions.
Also read: How to Find the Right Accounting Software for Your Business
2. Management Accounting
Management accounting is a types of accounting that is used by businesses around the world. Management accounting provides information that allows management to make important business decisions.
Information about management accounting is not shared with anyone else in an organization. When comparing managerial accounting and financial accounting, however, the latter is intended to inform investors, shareholders, and financial institutions about the performance and results of a business over a specific period of time.
Management accounting is also forward-looking. It identifies ways to make management more efficient and provides management with the resources and tools to create sound policies and procedures.
There are three types of management accounting that are most commonly used:
- Strategic Management
- Performance Management
- Risk management
Depending on the situation, management can use all three types of management accounting simultaneously. Or, they may choose to use only one or two depending on what information they need.
3. Governmental Accounting
Unlike financial accounting, which is governed under GAAP rules; governmental accounting is governed and managed by the Governmental Accounting Standards Board. This board, like GAAP, has established reporting and tracking standards for all levels.
Financial accounting is different from governmental accounting in that government entities use separate funds to track income and expenses.
For instance, If a county embarks on a road-improvement project, It would keep track of all expenses and income associated with that project in a capital project fund.
This tracking method is required to accurately report on how each fund or program performs and how public money has been spent.
Five governmental funds are usually used in most cases:
- General fund
- Permanent fund
- Special revenue fund
- Capital projects fund
- Fund for debt services
To provide an accurate report on the spending of money and account for any remaining funds, each fund must be separately tracked.
4. Public Accounting
A variety of clients can use public accounting firms to provide their accounting services, such as service businesses, manufacturers and retailers, non-governmental organizations, government organizations, individuals, and nonprofit organizations. Public accounting is focused on auditing, tax prep, tax advisory, consulting activity, financial statement preparation, and analysis.
Public accounting firms are also available to consult on business strategies, mergers, and acquisitions, as well as internal accounting systems.
Public accounting firms can also offer additional financial services such as bookkeeping, accounting management, and financial consulting to their clients. If necessary, public accounting firms can also help clients with accounting software selections.
5. Cost Accounting
Cost accounting is a specialization that examines the actual costs of running a business.
Cost accounting is used internally in manufacturing environments, but it can also be used to manage service businesses.
Cost accounting examines both fixed and variable costs a company incurs, such as labor, overhead maintenance and production costs. Management can then use this information to determine break-even points.
The majority of businesses use a standard costing method, which assigns an average product cost to production. However, other costing methods are possible.
Cost accounting can be considered a type of management accounting. It focuses on the future and is used primarily as an aid to the decision-making process, rather than a way to report past performance.
6. Forensic Accounting
Forensic accounting is an unusual combination of accounting, auditing, and investigative methods.
Forensic accounting can be used to investigate the financial transactions of individuals and businesses. Banks, lawyers, police, and businesses often use it to examine financial transactions and then provide the findings in a report.
In fraud and embezzlement cases, forensic accountants are often used. They use data collection and analysis techniques, reporting methods, and data analysis.
In addition, forensic accountants might be asked to reconstruct or recreate financial data. They are often called on to testify before a court to present their findings.
Also read: 10 Advantages of Accounts Payable Workflow Automation
7. Tax Accounting
Tax accounting, unlike other accounting forms, is regulated under the FASB. The Internal Revenue Code (IRC) regulates tax accounting. It is intended to ensure that individual taxpayers, businesses, and nonprofit organizations comply with all tax regulations and rules.
These entities are the partners of tax accountants to ensure that clients receive accurate information when reporting and calculating their tax liabilities.
Accounting requires accountants to be knowledgeable about the tax laws that change from year to year.
Tax accounting can also be used to calculate the tax due accurately, lower tax liabilities, prepare tax returns accurately and file tax forms promptly. This is important for individuals, businesses, and government entities as well as nonprofits.
Tax accounting is not only used to prepare tax returns but can also be used to plan taxes. This helps individuals and businesses to develop a tax strategy to minimize tax due.
8. Auditing
Accounting is the reporting and tracking of financial activity for a company. Auditing, however, is an independent analysis of financial activity that is used to verify that transactions are being recorded in accordance with accepted rules and standards.
There are many audits that can be done, including these:
- Compliance audit: An audit of a company’s policies and procedures is done to see if they are in compliance with regulatory or internal standards.
- Investigative Audit: Although a standard audit of an investigation may not uncover criminal activity, it could be used as a first step in a criminal case if suspicious activity is found.
- Financial audit: This is the most common type of audit and is used to verify financial statements.
- Tax audit: The IRS usually conducts a tax audit to verify the accuracy of tax returns.
