Types or branches of accounting

Types or branches of accounting

 Posted in: Introduction to financial accounting (explanations)

As a result of technology advancements and industrial and economic development, various types of accounting have evolved over time. Some popular types or branches of accounting are briefly discussed below:

Financial accounting





Management accounting





Cost accounting





Tax accounting





Project accounting





Not-for-profit accounting





International accounting





Government accounting





Social accounting





Forensic accounting





Fiduciary accounting





Auditing



1. Financial accounting

Financial accounting is concerned with the preparation of periodic financial reports by using historical data of a business enterprise. The basic purpose of these reports is to provide useful and timely information about an entity’s financial position and its operating results to owners, managers, investors, creditors and government agencies etc. Financial position refers to the resources and obligations of a business at any given point of time and operating results means the net profit earned or net loss incurred by a business enterprise during a particular period of time.

There are certain rules known as “generally accepted accounting principles (GAAP)” that each business enterprise must follow while preparing its financial reports to ensure that the financial information published by it is useful, reliable and comparable with other companies.

Financial accounting is also termed as the “general purpose accounting” because the information generated by it is published for the use of every one connected with the business enterprise.

A D V E R T I S E M E N T

2. Management accounting

Management accounting system uses historical as well as estimated data to generate useful reports and information to be used by internal management for decision making purpose. Unlike financial accounting, the information generated by management accounting is not published for external parties but is used by managers to perform their core functions such as evaluation of various products and departments in terms of profitability, selection of the best available alternatives and making other business decisions to achieve organizational goals. As the reports generated by management accounting are not used by any external party, the business enterprises don’t need to take care of GAAP.

3. Cost accounting

The cost accounting is concerned with categorizing, tracing and collecting manufacturing costs of a business enterprise. The cost data collected so is used by management in planning and control. A well established cost accounting system is essential for every business enterprise to have a proper control over costs.

4. Tax accounting

Tax accounting deals with the tax related matters of a business enterprise. It includes computation of taxable income and presentation of financial or other information to tax authorities required by tax laws and regulations of a country.

The reports and information generated by financial accounting system satisfy the needs of external parties to great extent. However, the rules and methods followed by a company for preparing its financial accounting reports may slightly differ from those required by tax laws. The work of a tax accountant is to adjust the net operating results and rearrange the information generated by financial accounting to conform with the tax reporting requirements of a country. Besides it, tax accountants also help companies minimize their tax obligations. Because of these functions, tax accountants need to have an updated knowledge about tax laws and regulations.

Tax accounting is also important for managers because taxes usually have a significant impact on the expected outcomes of proposed decisions.

5. Project accounting

Project accounting is a component of overall project management. It is a specially designed accounting system that prepares financial reports at appropriate time intervals to track the financial progress of a project. These reports provide vital information to project managers in performing their project management function. The use of project accounting is very common among companies involved in construction contracts.

6. Not-for-profit accounting

Not-for-profit accounting is concerned with recording events, preparing reports, and planning operations of not-for-profit organizations such as charities, churches, educational institutions, and government agencies etc.

7. International accounting

Intentional accounting deals with the issues and complications involved in doing trade in world markets. Many companies have expanded their business internationally. Such companies employ accountants who possess detailed knowledge about custom and taxation laws of various countries.

8. Government accounting

Government accounting is concerned with the allocation and utilization of government budgets. It ensures that the central or state government funds released for various purposes are being utilized efficiently. The proper record keeping makes the audit of completed projects possible.

9. Social accounting

Social accounting is concerned with analyzing and evaluating organizational impact on society and its environment. It measures the social costs and benefits of various organizational activities. For example, accountants in this area might analyze and evaluate the use of federal and state land or the use of welfare funds in a large city. Other accountants might analyze and evaluate the environmental impact of acid rain.

10. Forensic accounting

Forensic accounting deals with legal issues faced by business enterprises. Accountants in this area use their knowledge, skills and techniques to deal with legal matters such as dispute resolution, claim settlement, fraud investigation, court and litigation cases etc.

11. Fiduciary accounting

Fiduciary accounting refers to the management of financial records by a person to whom the custody and management of some property has been entrusted for the benefit of another person. Estate accounting, trust accounting, and receivership are some examples of fiduciary accounting.

12. Auditing

The term auditing generally refers to review, examination, verification, evaluation or inspection of historical data, records or events belonging to an entity. The person who performs the work of audit is known as auditor. In accounting and business, there are two types of auditing – external auditing and internal auditing.

External auditing refers to the independent examination of an entity’s financial statements and other accounting records that an entity publishes for the use of external parties. The auditor gives his opinion about the fairness of all accounting information examined by him. An important element of “fairness” is the compliance of financial statements with the generally accepted accounting principles (GAAP).

Internal auditing is performed to determine whether or not the policies and procedures set by management are being followed. An important purpose of internal auditing is to evaluate whether the activities performed by the employees at various levels are in line with the goals set by management. Internal auditing may be performed by the existing accountants, however many companies employ special staff for this purpose.

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