What Are The Multiple Types Of Accounting?

Accounting can be classified into multiple different classes. Each of these classes has its own traits and uses. They have different results as well as recording and maintenance. In this blog, we will be learning what are the multiple types of accounting. There are five different classes of accounting. These are:

• Financial Accounting

Financial accounting is a process of recording, summarizing, and reporting various transactions that occur over a period of time during the course of business. They convert all the daily transactions into financial statements, balance sheets, income statements, and cash flow statements. As a result, it provides information required by management and various other parties.

• Cost Accounting

The main purpose of this branch of accounting is to determine the total cost and per-unit cost of goods produced and serviced by a business. To clarify, it estimates the cost in advance and helps the management in implementing strict control over it. 

• Management Accounting

Management accounting presents the information to help in planning and controlling the operation of a business. However, it uses various techniques and concepts to make the accounting data more useful. For example, budgetary control, fund flow statement, and cash flow statement.

• Tax Accounting

This branch of accounting is used for tax purposes. It is governed by the Internal Revenue Code, which dictates the specific rules that companies and individuals must follow when preparing their tax returns.

• Social Responsibility Accounting

Social accounting is the process of communicating the social and environmental effects of an organizations’ economic actions to particular interest groups within society and society at large. That is to say, society provides the base and the facilities without which business cannot operate at all. Hence, the business also has a responsibility to society. Now that you know what are the multiple types of accounting, we will be learning about the different steps of accounting.

Different Steps Of Accounting

You might be wondering, what are the different steps of accounting. There are eight steps in the accounting cycle that accountants should follow to record transactions and check for data accuracy. Steps one through seven occur every accounting period regardless of the length while step eight only occurs at the end of the fiscal year. The different steps of accounting are like such: 

• Analyze transactions

The first step of accounting is to analyze events to determine if they are transactions and what their impact is. To clarify, transactions include any company purchases that were made, debts paid, debts acquired, or earnings acquired from sales. Events that aren’t considered transactions include creating purchase orders and signing contracts. That is to say, they are the starting point of accounting.

• Record journal entries

The next step in accounting is to record these financial transactions as journal entries. However, it should be done by following a chronological order. A journal entry has a debit and a credit side which relates to how a transaction affects different accounts. Whether an account is debited or credited is determined by how the balance of that account is tracked.

• Post entries to the general ledger

A ledger account is a collection of all journal entries that debit or credit that account. The general ledger is the master set of all ledger accounts. It keeps track of a company’s entire financial activity. When you post to the general ledger, you record a summary of the activity for each ledger account.

• Prepare an unadjusted trial balance

At the end of each accounting period, a company’s accounting department should enter the data from the ledger accounts into a trial balance. This is also called, “the unadjusted trial balance” as it is prepared before the adjusting entries are entered. This is prepared so that accountants can catch any errors that may have occurred during the initial stages of accounting. A trial balance is considered successful if the debit account balance and the credit account balance are equal.

• Check worksheets accuracy

This step of accounting is required when the debit and credit sides of a trial balance are unequal. On the other hand, the transaction data entered into past journal entries must be reviewed to find the error. Another error may include posting to the wrong accounts. For this error, debits and credits will equal but an accountant will notice unusual account activity or balances. To fix these errors, you will need to enter journal entries to reverse the incorrect entries and enter the correct ones.

• Adjusting journal entries

This step requires the usage of the matching rule to organize company transactions into the apt accounting periods. Adjustments are grouped into deferrals and accruals. Using this rule, accountants can examine deferrals and accruals to determine if they will be factored into a company’s total revenue or unearned revenue for the fiscal period. A common deferral is a prepaid expense. For example, a common accrual is a payable expense such as salary and wages.

• Organize financial statements

Once all adjusting entries are completed and you ensure the debits and credits still balance, then you can prepare the “Adjusted Trial Balance” as well as the financial statements. The financial statements are prepared in this order:

1. Income Statement
2. Statement of Retained Earnings
3. Balance Sheet
4. Statement of Cash Flows

Above all, the order is important as the net income from the Income Statement will be used to prepare the Statement of Retained Earnings. The ending balance on the Statement of Retained Earnings will be used to prepare the Balance Sheet. Finally, the Statement of Cash Flows is prepared because it uses information from the first three statements.

• Closing the book

This is the final step where a company ends the accounting cycle by closing its books at the end of the day on the specified closing date. Above all, the closing statement provides a report for analysis of performance over the period. In addition, after closing, the cycle starts over again from the beginning with a new reporting period. At closing is usually a good time to file paperwork, plan for the net reporting period, and review a calendar of future events and tasks. And these are the different steps of accounting. We already know what are the multiple types of accounting as well as the different steps of accounting so now we will learn what are the different classifications of accounts.

What Are The Different Classifications Of Accounts?

In accounting, the accounts are classified using one of two approaches. These approaches are the “Modern Approach” or the “Traditional Approach.” While the use of the traditional approach is very limited, the modern approach is used in almost every advanced country. We are going to tell you about what are the different classifications of accounts in detail.

• Modern Approach

This approach is also known as the “American Approach.” Under it, the accounts are not debited and credited. Hence, the Accounting Equation is used to debit or credit an account. As a result, this approach is also known as the “Accounting Equation Approach.” The Accounting Equation should remain balanced every time. Using the Modern Approach, the accounts are classified into different types. These types are as such:

• Asset Accounts
• Liability Accounts
• Capital or Owner’s Equity Accounts
• Withdrawal Accounts
• Revenue or Income Accounts
• Expense Accounts

• Traditional Approach

This approach is also known as the “British Approach.” Under this approach, the rules of debit and credit are golden rules. Further, using the Traditional Approach, accounts are classified into two types. These types are:

• Personal Accounts

These include the accounts of human beings, natural persons, and artificial persons. They are further classified into three more subtypes i.e. Natural Persons, Artificial Persons, and Representative Persons.

• Impersonal Accounts

These include accounts other than personal accounts. They have two more subtypes like Real Accounts and Nominal Accounts. Now you know what are the multiple types of accounting and everything about it.