To track and measure the finances of a company, businesses mainly use eight branches of accounting. Each branch of accounting has its own functions, uses, and theories that allow accounting personnel to get a better insight into the financial status of a business. You will also need to understand different accounting branches to ensure the success of your business and ensure its viability in the long term.
In this article, you will learn about the branches of accounting and why it is important for businesses to understand the accounting branches. Then, we will discuss the major branches of accounting, along with useful information about each branch. Hence, to learn more about the branches of accounting, read on through to the end of the article.
Branches Of Accounting – A General Overview
According to Indeed.com,
“Because of the increase of global business and the expansion of tax laws and regulations, accounting evolved to expand its branches and develop specialties in a particular area of finance. Developments in technology and the exchange of international currencies result in the expansion of accounting specialties that place their focus on a particular economic interest.”
Hence, it is important for businesses to understand the different branches of accounting. Having a thorough grasp of accounting will help the business ensure long-term success and viability of the business. Furthermore, if you want to familiarize yourself with various branches of accounting.
Although the business can use various accounting methods, it is important to become well-versed in particular types of accounting.
Branches Of Accounting – Why Are They Important?
According to Business News Daily,
“While having a strong handle on your business’s finances is important, the methods you use to track your expenses and income may differ from how other small businesses conduct their accounting. While you might use different accounting methods, it is important to be well-versed in the particular types of accounting should the need ever arise.”
You have to understand here that not all forms of accounting are the same. While some focus on costs, others focus on taxes, audits, etc. Accountants in businesses need to be specialized in one branch and carry on the job based on specialization. Moreover, a business also focuses on hiring those accountants who can work with the chosen accounting method of the business.
What Are The Major Branches Of Accounting?
According to Early Growth Financial Services,
“Accounting is meant to serve the public interest by reporting a firm’s financial situation accurately. Even though all of these branches of accounting focus on different aspects of business or even different types of businesses, they all adhere to facts, follow specific standards, and follow ethical processes.”
There are eight major branches of accounting. Let’s take a look at each of them in detail:
1. Financial Accounting
All the business transactions of a company are recorded and summarized in financial statements. This process is called financial accounting. In addition to that, the components include the income statement, balance sheet, cash flow statement, and retained earnings statement.
While the accountant creates financial reports for the company, the goal is to gain insights into the performance of the company in terms of finances.
Financial accounting can be of two types –
- Cash Accounting: Here, the accountant focuses on those business transactions that involve cash. If there are no monetary inputs in a transaction, they do not get a place in the financial statements.
- Accrual Accounting: Here, the accountant includes data from all company transactions and activities. The focus is on recording the revenue and expenses at the time of a transaction and not at the completion of the transaction.
2. Cost Accounting
In cost accounting, the job of the accountant is to analyze, evaluate, and report all the costs of the company, both variable and fixed costs. All these costs are mostly due to the production and manufacturing of a product or service. Based on the situation, cost accounting can be of many types.
- Standard: This involves the identification and analysis of the difference between the real production cost and the ideal cost of production.
- Activity-based: Here, the accounting process finds out the organizational activities. Then, the accountant uses the cost of these activities to calculate the cost of products and services.
- Lean: This includes the identification and elimination of wastes from organizational operations. Here, the focus is to improve the overall operational efficiency of operations in the organization.
- Marginal cost: Here, the accountant records the increase or decrease in the cost of production of items or providing a particular service.
3. Auditing Accounting
Generally, the Internal Revenue Service (IRS) audits the finances of businesses. This is called an IRS audit. However, a business can also do audits on its own. Here, the job related to the accounting process is the objective evaluation and examination of the financial statements of the business. This is to check whether all the financial information is correctly reported or not.
Basically, auditing can be of three types:
- Internal: Here, the accountant uses managerial tools to improve internal control and processes.
- External: In this case, an accounting firm performs the audit. Here, accountants review the internal controls as well as financial details of an organization. The report also contains the opinion of the auditor.
- IRS audit: The IRS reviews a company’s financial information. Here, they also ensure that the company’s financial information is on par with tax laws.
4. Managerial Accounting
In this case, the job of the accountant is to identify, measure, analyze, interpret, and communicate the financial information of the business to the management. The goal is to maximize profits and prevent losses. This financial information allows managers and business authorities to make better decisions in the business.
Here are a few examples of managerial accounting:
- Capital Budgeting: Here, the process includes analysis of information to make decisions on the basis of expenditures.
- Margin Analysis: The focus is on the optimization of production. Here, the accountant calculates the break-even point and finds out the best sales mix for products/ services.
- Trend Analysis and Forecasting: Here, the accounting managers focus on trends and patterns in product costs. Then, they find out unique variances from the forecast data.
5. Tax Accounting
Here, the accountants focus more on taxes rather than public financial statements. This type of tax accounting is more focused on transactions that impact the tax burden of the business and how those transactions relate to tax calculation and preparing tax documents. Here, the accountants follow the rules set in the IRC by the Internal Revenue Service (IRS).
The importance of tax accounting lies due to the complexity of tax laws. Furthermore, due to continuous changes in tax laws, it is essential to perform tax accounting from time to time. Here, the accountants/ auditors determine the company’s tax liability and report that to the government through tax forms. Hence, companies must consider hiring tax accountants compulsorily.
6. Accounting Information Systems
This is a computer-based method that businesses use to track accounting activities combined with technology resources. With the help of AIS, businesses collect, store, process, manage, retrieve, and report financial data for the use of accountants and other experts. The components of an AIS include computer hardware, software, telecommunication system, database & data warehouse, and human resources & procedure.
- Hardware: Generally includes computers or smartphones.
- Software: Includes the application programs, operating systems, etc., that are necessary to handle specific tasks.
- Telecommunications: This helps in the transmission of information from the computer to other areas. Here, a wired/ wireless network is required.
- Database & Data Warehouses: This is the place of accounting information storage, and it is easy to retrieve information from there.
- HR and Procedures: The human factor is one of the most important aspects of an organization. These people compile all the data and get insights from the knowledge present in the databases.
7. Fiduciary Accounting
In this case, the accounting expert records transactions that are mostly in connection to a trust or real estate. The recording is on the basis of cash. When cash is received, it is recorded, and when it is paid, it is recorded as disbursement. The business then provides such information to beneficiaries and courts.
However, the rules of fiduciary accounting can be different from different states and can even vary with respect to counties.
8. Forensic Accounting
Here, the expert combines accounting, auditing, and investigation skills to evaluate the business’s finances or the finances of an individual entity. Forensic accountants make financial evidence reports, and they communicate these reports with presentations for legal proceedings. You will mainly find these types of accounting processes during financial crimes and frauds.
How To Choose The Branches Of Accounting As Per Your Needs?
Just because these branches of accounting sit at the core of the accounting process does not mean everyone needs to use them throughout for them to work efficiently. So, how do you choose the best ones for the needs of your business?
Don’t worry, as we have covered you for this one.
Organizational Objectives
Various accounting methods have different purposes. For instance, financial accounting mainly focuses on external reporting for stakeholders. On the other hand, managerial accounting only caters to the internal decision-making of the organization.
Industry Requirements
Specific industries have very specific accounting standards and other regulatory requirements. Comprehending and complying with the accounting practices specific to one industry makes sure that the chosen accounting procedure matches the regulatory expectations with the norms of the industry.
Size And Complexity
Bigger companies might benefit from more delicate methods, such as international accounting. Likewise, small businesses might find financial accounting or cost accounting to be more suitable.
Reporting Needs
Take into consideration the reporting requirements of all the stakeholders, like creditors, investors, and regulatory bodies. Financial accounting is the best when it comes to external reporting. On the other hand, managerial accounting is preferable when it comes to offering internal reports for management decision-making.
Tax Implications
Tax accounting is particularly important when it comes to managing all such tax obligations. Evaluate the impact of each of the methods on tax liabilities and then consult with tax experts to make a decision that aligns with your tax planning strategies.
International Operations
For organizations that engage with international businesses, international accounting is the most important. The method ensures compliance with foreign accounting standards and simplifies the preparation of financial statements that meet all global reporting needs.
Governmental Regulations
For non-profit and government entities, fund accounting and government accounting are crucial. These methods particularly cater to the very specific regulations and reporting needs that govern the public and restricted funds within the nonprofit sector.
Internal Controls
In those cases where internal controls or risk management are Recritical, auditing is one of the most important accounting branches. Regular audits ensure that the financial information is accurate and reliable.
Role Of Accountants In The Branches Of Accounting
Accounting is not as easy as you think it to be. Companies do not always understand what works best for them. That is where an accountant comes into the game. There is no point in talking about the branches of accounting if we do not mention the job of an accountant. They are the actual professionals who have an accurate understanding of each of the branches of accounting and can guide you in the correct ways.
Strategic Advisors
Accountants have a more important role in businesses by offering strategic decisions that drive the operations of a company.
Compliance Experts
The rules and regulations are ever-evolving. Therefore, an accountant is always required in the company to keep compliance with all the changing rules.
Data Analysts And Predictive Modelers
The digital era is everything these days. It gives accountants the position of data analysts or predictive modelers. Harnessing data analytic tools allows accountants to bring out meaningful insights and further contribute to the decision-making process that is driven by data.
Final Thoughts
If you do not have a thorough idea of your business’s financial situation, you will not be able to make your business grow, and things will worsen fast. Once you adhere to one of the branches of accounting (methods), you will be able to ensure transparency in your business. You can then guarantee that your books are clear and accurate, thus enabling you to make decisions better.
One of the best ways of streamlining your accounting process will be to make use of accounting software systems. This will ensure you make your accounting processes faster. Do you have any more information to add regarding the branches of accounting? Share them with us in the comments section below.
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