What Are The Different Types Of Accounting?

Many believe that accounting is just that but the truth is that it is full of variety. There are multiple types, terms, and systems available. You may wonder why you need to learn about the various types of accounting. The answer is because you may need to use one or more in the future. So take time to learn about what are the different types of accounting.

The different types include:

1. Financial Accounting
2. Management Accounting
3. Governmental Accounting
4. Public Accounting
5. Cost Accounting
6. Forensic Accounting
7. Tax Accounting
8. Auditing

What Is Accounting?

We know what are the different types of accounting but do you know what is accounting?

It is the process of recording transactions related to a business. The process includes three steps namely: Summarizing, Analyzing, and Reporting. The reports are given to oversight agencies, regulators, and tax collection entities. Many believe that accountants only prepare taxes. But the truth is that they can also investigate white-collar crimes, audit businesses, or work in government.

Here is more detail on what are the different types of accounting:

• Financial Accounting

The main purpose of this is to track, record, and report on financial transactions by creating financial statements. It must be done following the guidelines found in Generally Accepted Accounting Principles (GAAP) rules. It gives a look at a business’s performance over a period of time in the form of financial statements. The final statements are then provided to outside stakeholders such as investors and financial institutions.

There are two types of financial accounting namely: Cash Accounting and Accrual Accounting. Both methods use double-entry accounting to record the transactions. Small businesses often use Cash Accounting. Though larger businesses, as well as publicly-traded businesses, are needed to use Accrual accounting.

• Management Accounting

This type of accounting is used in businesses worldwide. To sum up, it is designed to provide management with the information needed to make high-level decisions for the business. However, this information is shared solely with others in an organization. Management Accounting is always forward-looking, coming up with ways to operate more skillfully. They provide management with the tools and resources to form sound policies.

There are three types of Management Accounting commonly used. These are Strategic, Performance, and Risk Management. As per the situation, all three types can be used or only one or two at a time depending on the information they need.

• Governmental Accounting

While Financial Accounting is governed by GAAP rules, Governmental Accounting is governed by the Governmental Accounting Standards Board (GASB). Just like GAAP, it has developed tracking and reporting norms for all levels of the government. The main difference between Financial and Governmental Accounting is that governmental entities use separate funds to keep track of income and cost.

This method is necessary to report how each fund or program is doing. They also use the same to report how public money is being spent. In most cases, five types of funds are used:

• General Fund
• Permanent Fund
• Special Revenue Fund
• Capital Projects Fund
• Debt Services Fund

Each of these funds is tracked separately to provide a complete report of how money is spent, as well as account for any remaining funds.

• Public Accounting

Public Accounting firms provide services to a variety of clients. For example, service businesses, manufacturers, retailers, nonprofit organizations, governmental organizations, and individuals. This type of accounting focuses on auditing, tax preparation, tax advisory, and consulting activity. It also includes financial statement preparation and analysis. They also consult on various business strategies, mergers, acquisitions, and internal accounting systems.

In addition to all that, they may offer services to their clients. These services include complete bookkeeping, accounting management, financial consulting, and payroll services.

• Cost Accounting

This type of accounting is a specialty field that determines the actual cost of doing business. Cost Accounting is primarily used as an aid in the decision-making process. It is used internally and is basically used in a manufacturing environment. Though it can also be used in service businesses as well. It looks at both fixed and variable costs that a business earns. For example, the cost of materials, labour, overhead, maintenance, and production costs.

For example, most businesses use a basic costing system that assigns an average production cost. Though other costing methods can be used.

• Forensic Accounting

Forensic Accounting is a unique combination of accounting, auditing, and investigative techniques. It is used to investigate the financial activities of both individuals and businesses. This type of accounting is often used by banks, police departments, attorneys, and businesses. They examine financial transactions and later provide findings in a completed report.

Forensic accountants are frequently used in fraud cases, using data collection and analysis, preparation techniques, and reporting methods. They are often called to help recreate or reconstruct financial data. They are also asked to testify in court to explain their findings.

• Tax Accounting

Unlike other forms of accounting, which are managed by the Financial Accounting Standards Board (FASB), this is managed by the Internal Revenue Code (IRC). To clarify, it is designed to make sure that all the current tax rules are followed by businesses, nonprofit organizations, and individual taxpayers. It is used to calculate the tax due, lower tax liability, complete tax returns accurately, and file tax forms promptly.

• Auditing

Accounting involves tracking and reporting all financial activities for a business. Auditing, on the other hand, is designed to provide an independent analysis of the activities. This ensures a business is recording transactions following all the acceptable rules and norms that apply. There are a variety of audits that may be performed. These include:

• Compliance Audit
• Investigative Audit
• Financial Audit
• Tax Audit

What Is The Purpose And Importance Of Accounting?

Many people wonder what is the purpose and importance of accounting. To sum up, it helps you stay organized, backs up your tax returns, and holds you accountable. It guides in decision making and you can measure new strategies. This can be said that without accounting, you are in trouble.

The purpose of accounting is to gather and report on financial information about the performance, financial position, and cash flows of a business. It plays a vital role in business because it helps you track income and costs. As well as ensuring legal compliance. This gives investors, management, and government with financial information which can be used in making important business decisions.

The information is then used to reach decisions about how to manage the business, or invest in it, or lend money to it. This information is gathered in accounting records with transactions that are recorded either through basic business transactions such as customer or supplier invoices or through more specialized transactions, known as journal entries.

Accounting Services For Small Businesses

Accounting and business are like peanut butter and jelly. To clarify, you cannot have one without the other. As a small business, you must be busy, having very little time to maintain a record of your finances. Invoice your clients and put together annual financial reports. You may also have to prepare taxes on time or handle your employees’ payroll. This is where accounting services come in handy. Accounting services for small businesses are important. The services help to keep businesses on track regarding various payments, financial development, bookkeeping, and business expenses. Professionals provide advice to small businesses on the right investment and best structure for their business to ensure financial stability.