What are the different branches or types of accounting?
Accounting, as we all know, is the backbone of every organization. There are several types of accounting, and without accounting, companies wouldn’t be able to flourish and grow. The accounting process holds together all the financial functions of an organization, leading to accountability and order.
Not many know that accounting as a practice was established in medieval times in response to the development of trade and commerce. The presence of accounting can be found as back as the mid-1400, with the first accounting work published in 1494 in Italy by a Venetian monk. Therefore, it is evident that accounting as a means of bookkeeping has been around for centuries at a stretch.
Another important fact to remember is that the principles on the basis of which accounting was developed, haven’t changed much since they were first introduced. Assets, liabilities, income, and reconciliation are still the fundamental basis for all accounting processes.
Though the fundamentals haven’t changed in a long time, with the passing years, new accounting fields and branches have come up. Reports compilation and transaction recording have evolved, thanks to the introduction of technology, and many other new functions such as data entry and reports building have cropped up.
However, the fundamental use of accounting still remains the same: to receive a complete financial health snapshot of the business. As a result of the many financial, industrial and technological advancements, different specialised and niche branches of accounting have emerged.
Branches or Types of Accounting:
- Financial Accounting
- Management Accounting
- Cost Accounting
- Tax Accounting
- Forensic Accounting
- Fiduciary Accounting
- Fund Accounting
- Social Accounting
Financial accounting is a branch of accounting concerned with the supplying of financial information about a company to external stakeholders, such as shareholders, financers/creditors, and the government. The financial accounting function of a company engages itself in preparing the periodic financial statements which are then made available to the public and stakeholders.
There are four basic financial statements: the income statement, the balance sheet, the cash flow statement, and the statements of retained earnings. These financial statements form the base of how well a company is positioned financially in the market. Shareholders, bondholders, and banks rely on this information to decide if they should continue supplying capital to the company. On the other hand, the general public uses this information to make decisions about investments in the company.
The information disclosed in these financial statements is also used by the stock exchange and other stockbroking firms to analyze the performance of public-listed companies and determine if investing in their stock is a good idea. All companies in the UK while preparing their financial statements have to abide by the International Financial Reporting Standard (IFRS) or the UK Generally Accepted Accounting Practice (GAAP). Most Accounting companies offer financial accounting services.
Contrary to financial accounting, management accounting involves the supply of financial information within the internal departments of an organization. Management accounting is a branch of accounting that is focussed on analyzing finances to prepare internal financial reports and records that assist the managers of different departments in the decision-making process to help drive business value.
Management accounting helps make sense of the financial data and translates this data into useful figures and statistics for the higher management and decision-makers within an organization.
Reports can be made as per the specific needs of managers or individual functional areas, such as marketing, sales, or manufacturing. Historic and estimated data is used to create these reports so that comprehensive insights can be generated to help the internal management improve business decisions.
Unlike financial statements, management reports are not disclosed to or published for external parties, instead, these are utilised by managers to improve the core processes, such as profit evaluation of products or even departments and budgeting. Management accounting is one accountancy outsourcing service that Outbooks excels at.
Many people confuse management accounting with cost accounting, and though these two have a few overlapping functions, they are completely separate branches of accounting. Cost accounting is focussed on generating information to control operations for maximizing profits and improving the efficiency of business processes, due to which it is also called control accounting.
Cost accounting involves the recording, classifying and summarizing of the cost data via a completely quantitative approach. It includes the management of the overall costs involved in running a business. Cost data is used by the company management to plan and control cost operations. Cost accounting aims to track the production cost and the fixed costs of a company.
Material (direct and indirect), labour (direct and indirect) and overhead (sales, distribution, administration, production, etc.) are the three major elements of cost accounting.
The branch of tax accounting has the responsibility of ensuring companies follow the tax regulations and compliances mandated by government agencies. It handles the tax-related matters of the business and entails the calculation of the taxable income. Tax accountants are liable to disclose financial and other information to tax officials, as and when demanded. Enterprises have to ensure they do not default on any state or local taxes, or they may be subject to government penalties.
Tax accountants help ensure proper compliance with tax regulations. They also assist with tax filing and planning to decrease the company’s tax burden in the future.
Tax accounting rules greatly vary from one country to the other. Also, the government of countries keeps updating and changing their tax laws from time to time. Therefore, tax accountants have to be up-to-date with the current taxation laws and rules.
Tax accounting also involves advising about the effects of taxes on different business functions, legally minimizing taxes, and dealing with legal implications, if any.
Auditing is one of the most crucial branches of accounting, and companies spend millions every year to ensure auditing compliance. It involves the process of reviewing, examining, verifying and evaluating a firm’s financial accounts and the system of internal control. This process is carried out by auditors, who may be internal or external.
External auditors are independent firms that evaluate the accounts of a company and dole out a fair verdict about whether or not the financial records conform to the IFRS or the UK GAAP. In the UK market, PwC, Delloite, KPMG, and EY are the big four auditing firms.
External auditors are mainly accountable to the public outside who use the financial statements issued by the company to make several investment-related decisions. Internal auditors, on the other hand, are answerable to the company management.
These auditors assess if the policies set by the management are being implemented and followed. A vital task of internal auditing is to check if employee activities are in line with the company’s business goals. Internal auditing is usually done by the existing accountants, but some companies also hire special resources for it.
Forensic accounting is often said to be an amalgamation of accounting, auditing, and investigation. It involves the analysing of information and records of a company’s accounts for use in a court of law.
It also involves quantifying the damages in matters of embezzlements, frauds, and falsification of accounts as well as in cases of personal insurance, injury, business dispute, divorce and marital clashes, environmental harms, and cybercrimes, among others.
Anything that involves court litigation, investigation and dispute resolution comes within the ambit of forensic accounting. Forensic accountants may be called in if anything suspicious surfaces during the external audit of a company.
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Fiduciary accounting is the process by which a fiduciary or a trustee of a property or an asset communicates regular information about the financial administration of the related funds to the parties in interest or even the government. The fiduciary has the responsibility of periodically keeping the principals informed about the transactions and investment policies being followed.
Fiduciary accounting comes under the direct scrutiny of the law and court, thus it has to be accurate, precise and carefully documented. It has to be transparent, as the fiduciary has been entrusted with the responsibility of somebody else’s property or similar assets. Trust accounting, estate accounting, and receivership are some types of fiduciary accounting.
Fund accounting is a part of non-profit entities, such as governments and not-for-profit establishments. Fund accounting is not a means of attaining profits but achieving the objectives of the parent firm. General funds are distinguished from special funds, as general funds are used for day-to-day activities such as paying wages, whereas special funds are used for specific objectives and undertakings, such as hosting a special event.
Non-profit firms often struggle with scarce funds and less financial resources, thus, it is absolutely essential to have an effective accounting system in place to ensure resources are carefully allotted.
Social accounting aims to incorporate the realization of social and environmental impact on the day-to-day accounting activities of organizations. In the corporate setup, social accounting is closely related to the Corporate Social Responsibility (CSR) concept.
Social accounting analyses and measures the impact of an organization on society and the environment. It also measures the social costs and benefits of organizations’ activities. Just like any other branch of accounting, social accounting is also a method of quantifying the performance of a company, but in terms of social accountability.
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