If you’re just getting through accounting 101, you’re probably still a little unclear about the various types of accounting fields being used today.
After all, isn’t accounting just accounting? Actually, no. The fact is that the accounting field is full of variety, with multiple accounting types, accounting terms, and accounting systems available.
You may be wondering why you need to learn about the various types of accounting. The best answer is you may need to use one or more of them in the future. So why not take a few minutes and learn about these different accounting fields?
At a glance: The different types of accounting
- Financial accounting
- Governmental accounting
- Public accounting
- Cost accounting
- Forensic accounting
- Management accounting
- Tax accounting
- Auditing
The 8 types of accounting
Contrary to popular belief, accountants don’t only prepare taxes. Accountants can also investigate white collar crimes, audit businesses, or work exclusively in government and manufacturing environments.
Accountants can be CPAs (Certified Public Accountants) or perform bookkeeping and accounting tasks such as managing the accounting cycle at a small business or a large corporate entity. They can also work for a nonprofit or a large consulting firm.
Here are some of the different areas of accounting and what they entail.
1. Financial accounting
The primary purpose of financial accounting is to track, record, and ultimately report on financial transactions by generating financial statements.
This must be done using the standardized guidelines found in Generally Accepted Accounting Principles (GAAP) rules. These rules are set by the Financial Accounting Standards Board (FASB) and are designed to promote consistency in the reporting process, so Company A will use the same reporting methodology as Company B.
Financial accounting always looks at past performance, and does not look ahead like management accounting.
Instead, financial accounting provides an accurate look at business performance over a specified period of time in the form of financial statements. The completed statements are provided to outside stakeholders such as investors and financial institutions.
There are two types of financial accounting: cash and accrual accounting. Both methods use double-entry accounting to accurately record financial transactions.
While very small businesses frequently use cash accounting, all larger businesses as well as publicly traded businesses are required to use accrual accounting.
Management reports focus internally while financial statements focus on company performance.
2. Management accounting
Management accounting is a form of accounting used in businesses worldwide. Management accounting is designed to provide management with the information necessary to make high-level decisions for the business.
Management accounting information is shared exclusively with others in an organization. However when comparing managerial and financial accounting, the latter is designed to inform shareholders, investors, and financial institutes about the performance of a business for a specified period of time.
In addition, management accounting is forward-looking, devising ways to operate more efficiently while providing management with the tools and resources to form sound policies and procedures.
Three common types of management accounting are used:
- Strategic management
- Performance management
- Risk management
Depending on the circ*mstances, all three types of management accounting may be used simultaneously, or management may choose to only use one or two methods, depending on the information they desire.
3. Governmental accounting
Unlike financial accounting, which is governed by GAAP rules, governmental accounting is governed by the Governmental Accounting Standards Board (GASB), which like GAAP, has developed tracking and reporting standards for all levels of the government.
The main difference between financial accounting and governmental accounting is that governmental entities use separate funds to keep track of income and expenditures.
For instance, if a county undertakes a road improvement project, they would keep track of all income and expenses related to that project in a capital projects fund.
This method of tracking is necessary in order to accurately report how each fund or program is performing and how public money is being spent.
In most cases, five governmental funds are used:
- General fund
- Permanent fund
- Special revenue fund
- Capital projects fund
- Debt services fund
Each fund must be tracked separately in order to provide a complete report on how money is spent, as well as account for any remaining funds.
4. Public accounting
Public accounting firms provide accounting services to a variety of clients, including service businesses, manufacturers, retailers, nonprofit organizations, governmental organizations, and individuals. Public accounting focuses on auditing, tax preparation, tax advisory, and consulting activity, including financial statement preparation and analysis.
Public accounting firms can also consult on various business strategies, mergers, acquisitions, and internal accounting systems.
In addition, public accounting firms may offer other financial services to their clients such as complete bookkeeping, accounting management, financial consulting, and payroll services. Public accounting firms may also advise clients on accounting software applications if necessary.
5. Cost accounting
Cost accounting is a specialty field that looks closely at the actual cost of doing business.
Used internally, cost accounting is typically used in a manufacturing environment, though it can be used for service businesses as well.
Cost accounting looks at both fixed and variable costs that a business incurs such as materials, labor, overhead, maintenance, and production costs, ultimately providing management with important information such as break-even points.
Most businesses will use a standard costing system, which assigns an average cost to product production, though other costing methods can be used.
The chart below demonstrates how to use cost accounting to calculate manufacturing costs:
Calculating manufacturing costs can help management establish a profit point.
Cost accounting is considered a form of management accounting, focusing on the future, and is primarily used as an aid in the decision-making process rather than as a way of reporting past performance.
6. Forensic accounting
Forensic accounting is a unique combination of accounting, auditing, and investigative techniques.
Forensic accounting is used to investigate the financial activities of both individuals and businesses. It is frequently used by banks, police departments, attorneys, and businesses, examining financial transactions and later providing those findings in a completed report.
Forensic accountants are frequently used in fraud and embezzlement cases, using data collection and preparation techniques, data analysis, and reporting methods.
Furthermore, forensic accountants may be called upon to help recreate or reconstruct financial data, and are frequently asked to testify in court to explain their findings.
7. Tax accounting
Unlike other forms of accounting, which is regulated by the FASB, tax accounting is regulated by the Internal Revenue Code (IRC), and is designed to ensure that all current tax rules and regulations are followed by businesses, nonprofit organizations, and individual taxpayers.
Tax accountants work with these entities to ensure accuracy when calculating and reporting tax liabilities for their clients.
Tax accounting requires accountants to be familiar with the various tax laws that change from year to year.
Additionally, tax accounting is used to accurately calculate tax due, lower tax liability, complete tax returns accurately, and file tax forms in a timely manner. This is necessary for individuals, businesses, government entities, and nonprofits.
In addition to preparing tax returns, tax accounting can also be used for tax planning, which helps both individuals and businesses develop a tax strategy in order to minimize taxes due.
8. Auditing
While accounting involves the tracking and reporting of all financial activity for a business, auditing is designed to provide an independent analysis of that financial activity to ensure that a business is recording transactions following the acceptable rules and standards that apply.
All financial auditors are accountants, though all accountants are not auditors.
A variety of audits may be performed including the following:
- Compliance audit: A compliance audit examines the policies and procedures used by a company or a department within a company to determine if is currently in compliance with internal or regulatory standards.
- Investigative audit: Though a standard investigative audit may not reveal criminal activity, it can be the first step in a criminal case, should suspicious activity be found.
- Financial audit: A financial audit is the most frequent kind of audit performed and is designed to analyze financial statements for accuracy.
- Tax audit: A tax audit is typically conducted by the IRS in order to obtain additional information regarding the accuracy of a tax return.
What all types of accounting have in common
Whether governed by GAAP, GASP, or IRC rules and regulations, the one thing that all types of accounting have in common is their adherence to facts.
This means that whether an accountant is writing an invoice for your business, testifying in an embezzlement trial, or preparing a fortune 500 company’s financial statements, the end result must always be factual.
