Every business owner needs to keep track of company finances. Accounting is essential for organizations to get an overview of financial stability, simplify annual tax filing, and more. Businesses need to focus on multiple types of accounting to deal with different aspects of financial management. Scroll through this article to explore the different types of accounting, their purpose, and more.
Importance of Accounting
The different types of accounting have benefits beyond exploring a company's financial records. Some of the other benefits of various types of accounting are as follows:
Availing Bank Loans
Several types of accounting help in providing the financial reports of a company to banks and other lenders. They assess the credit score and financial stability of the company and sanction a loan accordingly.
Provides Information to Stakeholders
The different stakeholders of an organization are required to gain knowledge about the financial status of a company. The various types of accounting enable stakeholders to make the right investment decisions. Moreover, employees, customers, and others need to know about business performance to assess the company's success.
Strategic types of accounting can help a business with budget allocation. Accounting is necessary for obtaining real-time financial data about a business. The various types of accounting can help with assessing financial stability, which leads to accurate budget creation, including all income and expenses.
Different Types of Accounting: Understanding the Various Specializations
The different types of accounting integral to businesses are as follows:
What Is Management Accounting?
Management accounting helps businesses acquire in-depth insights into organizational operations. It is one of the types of accounting meant for internal use. Therefore, it does not have to strictly adhere to GAAP guidelines. Unlike the different types of financial accounting, management accounting focuses on budgeting, financial analysis, and cost analysis.
Financial accounting helps with collecting and summarizing the financial transactions of a business to create detailed reports. It is one of the types of accounting which help generate financial records like cash flow statements and balance sheets to provide in-depth insights about an organization's fiscal health. Unlike other types of accounting focused on the future, financial accounting focuses on the past.
The different types of financial accounting include cost accounting and accrual accounting. Cash accounting revolves around corporate transactions involving cash. Meanwhile, accrual accounting takes into account all types of transactional data, irrespective of monetary outflow or inflow. Therefore, it is one of the types of financial accounting that goes beyond cash accounting.
Cost accounting can help industries manage high resource management costs. It is one of the types of accounting used by businesses to strategically examine their internal operations. Cost accounting takes into account a company's variable and fixed costs for recording and evaluating production costs.
You will come across different types of cost accounting. For instance, activity-based cost accounting is for evaluating activities required to produce company goods or services. On the other hand, lean accounting helps with preventing wastage. The other two types of cost accounting include standard cost accounting and marginal cost accounting.
It is one of the types of accounting associated with legal fields. Forensic accounting helps determine whether a company has been involved in any financial crime. Moreover, forensic accounting has importance beyond industries. For instance, it is often done in divorce cases to expose the hidden assets of a spouse.
It is one of the types of accounting to determine the payable income tax and other tax amounts. Tax accounting also helps with finding legal ways of reducing payable taxes. Additionally, it is one of the types of accounting focused on helping organizations with tax compliance.
Governmental accounting involves the financial planning of different departments within a local, state, or federal government. It is one of the types of accounting that need to strictly comply with government rules and regulations. It is also one of the types of accounting to allocate proper funds and resources accurately.
Public accounting businesses offer accounting advice to clients as per their needs. It is one of the types of accounting that can help with auditing, tax returns, and more.
How Do These Types of Accounting Differ from Each Other?
Check out this table to familiarize yourself more with the different types of accounting.
Types of Accounting
Collecting financial data, analyzing it, creating reports, and presenting it to management
Capital budgeting, margin analysis, cash flow analysis, trend analysis, constraint analysis, and more
Tracking, recording, and organizing financial transactions
Cash accounting and accrual accounting
Useful in manufacturing environments for analyzing different expenditures
Standard costing, marginal costing, lean accounting, and activity-based costing
Useful for legal purposes to identify criminal activities like fraud, embezzlement, and more
Financial theft, bankruptcy, defaulting on debt, securities fraud, professional negligence claim, and more
Tax Accounting or Auditing
Checking compliance of a business to tax laws and regulations
Useful for financial planning and resource allocation to different departments
Fund accounting, budgetary accounting, and proprietary accounting
Involves offering accounting advice to clients
Auditing, tax return assistance, and more
Common Aspects Between Various Types of Accounting
The various types of accounting handle different business aspects. But a few common things about all types of accounting are as follows:
Following specific standard
Adhering to facts
Using ethical practices
The primary characteristic of accountancy is to serve the public interest with accurate reporting of an organization's financial status.
Can individuals specialize in a specific type of accounting?
Yes, individuals can specialize in specific types of accounting. Specialized accountants acquire knowledge and expertise about particular types of accounting to provide more detailed and accurate services.
How many types of cost accounting are there, and what are they?
You will come across four types of cost accounting. They include standard costing, marginal costing, lean accounting, and activity-based costing.
What are the different types of accounting?
The different types of accounting include management accounting, financial accounting, cost accounting, public accounting, tax accounting, and more.
What are the different types of auditing?
Auditing can either be external or internal. External auditing is performed to review the formal financial statements of a company. Internal auditing is performed to analyze the current accounting processes of a business. IRS audits are another type that is useful for checking the compliance of a company's accounting records with tax laws.
What are the two main types of financial accounting?
The two main types of financial accounting are cash accounting and accrual accounting. The difference between the two types of financial accounting lies in the timing from which the transactions are considered.
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