The 8 Branches of Accounting: Their Uses and How They Work
There are eight types of financial accounting. Each branch has come about thanks to technological, economic or industrial developments and has its own specialized use. Accountants tend to specialize in one branch.
Some of these branches of accounting are important to small businesses. Their usefulness will be noted below, as applicable.
In this article, we’ll cover:
- Financial Accounting
- Cost Accounting
- Managerial Accounting
- Accounting Information Systems
- Tax Accounting
- Forensic Accounting
- Fiduciary Accounting
1. Financial Accounting
Financial accounting involves recording and categorizing transactions for business. This data is generally historical, meaning it’s from the past.
It also involves generating financial statements based on these transactions. All financial statements, such a balance sheet and income statement, must be prepared according to the generally accepting accounting principles (GAAP), according to Accountingverse.
Public companies have to follow a set of rules set out by the government (this is the Securities and Exchange Commission in the U.S.).
Financial accounting is performed to conform to external regulations and is not for internal employees to analyze and make financial decisions—managerial accounting is used for this purpose.
2. Cost Accounting
Cost accounting is considered a type of managerial accounting. Cost accounting is most commonly used in the manufacturing industry, an industry that has a lot of resources and costs to manage. It is a type of accounting used internally to assess a company’s operations.
Cost accounting concerns itself with recording and analyzing manufacturing costs. It looks at a company’s fixed (unchanging and constant costs, like rent) and variable costs (changing costs, like shipping charges) and how they affect a business and how these costs can be better managed, according to Accounting Tools.
There are two types of auditing: external and internal auditing. In external auditing, an independent third party reviews a company’s financial statements to make sure they are presented correctly and comply with GAAP.
Internal auditing involves evaluating how a business divides up accounting duties, who is authorized to do what accounting task and what procedures and policies are in place. Internal auditing helps a business zero in on fraud, mismanagement and waste or identify and control any potential weaknesses in its policies or procedures, according to Accounting Tools.
4. Managerial Accounting
Also known as management accounting, this type of accounting provides data about a company’s operations to managers. The focus of managerial accounting is to provide data that managers need to make decisions about a business’s operations, not comply strictly with GAAP.
Managerial accounting includes budgeting and forecasting, cost analysis, financial analysis, reviewing past business decisions and more. Cost accounting is a type of managerial accounting.
FreshBooks has simple online accounting software for small business that makes it easy to produce these reports.
5. Accounting Information Systems
Known as AIS for short, accounting information systems concerns itself with everything to do with accounting systems and processes and their construction, installment, application and observation. This can include accounting software management and the management of bookkeeping and accounting employees.
6. Tax Accounting
Tax accounting involves planning for tax time and the preparation of tax returns. This branch of accounting aides businesses be compliant with regulations set up by the IRS.
Tax accounting also helps businesses figure out their income tax and other taxes and how to legally reduce their amount of tax owing. Tax accounting also analyzes tax-related business decisions and any other issues related to taxes.
7. Forensic Accounting
This specialized accounting service is trending in accounting and is becoming increasingly popular. Forensic accounting focuses on legal affairs such as inquiry into fraud, legal cases and dispute and claims resolution.
Forensic accountants need to reconstruct financial data when the records aren’t complete. This could be to decode fraudulent data or convert a cash accounting system to accrual accounting. Forensic accountants are usually consultants who work on a project basis, according to Accounting Tools.
8. Fiduciary Accounting
This branch of accounting centers around the management of property for another person or business. The fiduciary accountant manages any account and activities related to the administration and guardianship of property.
Fiduciary accounting covers estate accounting, trust accounting and receivership (the appointing of a custodian of a business’s assets during events such as bankruptcy).
People also ask:
What Are the Three Types of Accounting?
Though there are eight branches of accounting in total, there are three main types of accounting, according to McAdam & Co. These types are tax accounting, financial accounting and management accounting.
Management accounting is useful to all types of businesses and tax accounting is required by the IRS. Financial accounting is only relevant to larger companies.
In this type of accounting, all records and reports are made according to regulations established by the tax authorities. Small businesses can hire a tax accountant who specializes in making sure the accounting records are IRS-compliant and who transfers that information to the business tax return.
Financial accounting is performed with potential lenders and investors in mind, as well as GAAP (generally accepted accounting principles). Using this standard accounting methods helps investors and lenders get an accurate read on a business’s financial health if a company is looking to finance a new purchase or venture.
It also helps businesses be transparent by reporting management’s income.
Larger businesses often employ accountants in-house to help them comply with these standard accounting principles.
This category of accounting doesn’t follow GAAP but it does follow standard accounting practices taught in accounting school.
The focus here is on generating financial statements like budgets, product costings, cash flow projections and business acquisition analysis reports. Standard reports like balance sheets, profit and loss statements and cash flow statements are generated in a way to help managers analyze past decisions and plan for the future.
Small businesses may only use cash projections. Larger companies, especially manufacturers, will use many more reports.
What Are the Two Types of Accounting?
There are two types of accounting methods: cash and accrual. Most small businesses can use either method. Businesses that are corporations or have gross revenue over $5 million per year are required to use the accrual method, according to the IRS.
The cash accounting method is the simplest method. When money comes in, revenue is recorded. When money goes out, an expense is recorded, according to the Houston Chronicle.
In accrual accounting, revenue is recorded when it’s earned, not when money actually comes in. A company can perform a service and bill the client. Even if the client hasn’t paid yet, revenue is still recorded in the books.
Expenses are matched to revenue in accrual accounting, meaning they’re recorded at the same time as revenue. So if a house painter has to buy paint for a job, the total income for the job and the cost of the paint are recorded in the books at same time. It doesn’t matter exactly when the paint was purchased.
Want more details on the difference between cash and accrual accounting? This article goes in-depth on this subject and looks at which method is better.