Branches of accounting

Technological advancement and industrial and economic development have resulted in the evolution of various types or branches of accounting over time. Some popular types or branches of accounting are briefly discussed below:

Contents:

1. Financial accounting
2. Management accounting
3. Cost accounting
4. Tax accounting
5. Project accounting
6. Not-for-profit accounting
7. International accounting
8. Government accounting
9. Social accounting
10. Forensic accounting
11. Fiduciary accounting
12. Auditing

1. Financial accounting

Financial accounting is concerned with the preparation of periodic financial reports by using historical data about 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, government agencies, etc. Financial position refers to the resources and obligations of a business at any given point in time, and operating results mean 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 that of other companies.

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

2. Management accounting

The 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 purposes. 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 evaluating various products and departments in terms of profitability, selecting the best available alternatives, and making other business decisions to achieve organizational goals. As the reports generated by the management accounting system are not accessed and used by any external party, the business enterprises don’t need to take care of GAAPs while drafting them.

3. Cost accounting

Cost accounting is concerned with categorizing, tracing, and collecting the manufacturing costs of a business enterprise. The cost data collected through the cost accounting system is used by management in exercising its planning and control functions.

The unnecessary costs eat up profit and can damage business sustainability. A well-established cost accounting system is, therefore, essential for every business enterprise to have proper control over its costs.

4. Tax accounting

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

The reports and information generated by the financial accounting system satisfy the needs of external parties to a 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 includes adjusting the operating results of the business and rearrange the information generated by the entity’s financial accounting system so that they comply with the tax reporting requirements of a country. Besides that, tax accountants also help companies minimize their tax obligations. Because of these functions, tax accountants need to have up-to-date knowledge about the tax laws and regulations of the state or country where the entity is located or conducts business.

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 intervals of time to track the financial progress of a project. These reports provide vital information to project managers in performing their project management functions. The use of project accounting is very common among companies involved in construction contracts.

6. Not-for-profit accounting

Not-for-profit accounting fulfills the accounting needs of not-for-profit organizations (also known as non-trading concerns). It is concerned with recording events, preparing reports, and planning the operations of not-for-profit organizations such as charities, churches, educational institutions, hospitals, government agencies, clubs, etc. The basic accounting principles and concepts used while applying not-for-profit accounting are the same as those used in regular or general-purpose financial accounting.

7. International accounting

Intentional accounting deals with the issues and complications involved in doing trade in world or international markets. Many companies have expanded their business internationally. Such companies need to employ accountants who possess detailed knowledge about accounting practices, custom duties, and taxation laws applicable in different countries.

8. Government accounting

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

9. Social accounting

Social accounting is concerned with analyzing and evaluating the 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. They might also 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 have 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 the review, examination, verification, evaluation, or inspection of historical data, records, or events belonging to an entity. The person who performs the work of auditing is known as an 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 the entity is legally required to publish for the use of its stockholders and other parties. The auditor gives his opinion about the fairness of the financial statements and other accounting records examined by him. An important element of “fairness” is the compliance of financial statements with 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.