The 8 Branches of Accounting: Their Uses and How They Work

8-branches-of-accounting

Financial accounting is classified into eight types. Each branch arose as a result of technological, economic, or industrial advancements and has its own specialised application. 

Accountants typically specialise in one field. Some of these accounting branches are critical to small businesses. As applicable, their utility will be noted below.

In this article, we will cover:

  1. Financial Accounting 

Financial accounting entails recording and categorising business transactions. This information is generally historical, which means it is from the past. It also entails creating financial statements from these transactions. 

According to Accountingverse, all financial statements, such as a balance sheet and income statement, must be prepared in accordance with generally accepted accounting principles (GAAP).

The government has established a set of rules for public companies to follow (this is the Securities and Exchange Commission in the U.S.).

Financial accounting is performed to conform to external regulations and is not for internal employees to analyze and make financial decisions—managerial accounting is used for this purpose.

  1. Cost Accounting 

Cost accounting is considered a type of managerial accounting. Cost accounting is most commonly used in the manufacturing industry, an industry that has a lot of resources and costs to manage. It is a type of accounting used internally to assess a company’s operations.

Cost accounting concerns itself with recording and analyzing manufacturing costs. It looks at a company’s fixed (unchanging and constant costs, like rent) and variable costs (changing costs, like shipping charges) and how they affect a business and how these costs can be better managed, according to Accounting Tools.

  1. Auditing

External auditing and internal auditing are the two types of auditing. An independent third party reviews a company’s financial statements to ensure they are presented correctly and in accordance with GAAP.

Internal auditing entails assessing how a company divides accounting responsibilities, who is authorised to perform which accounting tasks, and what procedures and policies are in place. 

According to Accounting Tools, internal auditing assists a company in detecting fraud, mismanagement, and waste, as well as identifying and controlling any potential weaknesses in its policies or procedures.

  1. Managerial Accounting 

This type of accounting, also called management accounting, gives managers information about a company’s operations. 

Managerial accounting’s goal is to provide managers with the information they need to make decisions about a company’s operations, not to follow GAAP to the letter.

Budgeting and forecasting, cost analysis, financial analysis, reviewing previous business decisions, and other aspects of managerial accounting are covered.

Managerial accounting is a type of cost accounting.

  1. Accounting Information Systems 

Accounting information systems, referred to as AIS, is concerned with all aspects of accounting systems and processes, including their design, implementation, application, and monitoring. 

Accounting software management and the management of bookkeeping and accounting employees are examples of this.

  1. Tax Accounting 

Tax accounting includes both tax planning and tax return preparation. This branch of accounting assists businesses in complying with IRS regulations.

Tax accounting also assists businesses in determining their income tax and other taxes, as well as how to legally reduce the amount of tax owed. 

Tax accounting also examines tax-related business decisions and other tax-related issues.

  1. Forensic Accounting 

This specialized accounting service is trending in accounting and is becoming increasingly popular. Forensic accounting focuses on legal affairs such as the inquiry into fraud, legal cases and dispute and claims resolution.

Forensic accountants need to reconstruct financial data when the records aren’t complete. This could be to decode fraudulent data or convert a cash accounting system to accrual accounting. Forensic accountants are usually consultants who work on a project basis, according to Accounting Tools.

  1. Fiduciary Accounting 

This area of accounting is concerned with the management of property for the benefit of another person or business. The fiduciary accountant oversees all accounts and activities related to property administration and guardianship.

Fiduciary accounting encompasses estate accounting, trust accounting, and receivership (the appointment of a custodian of a business’s assets in the event of an event such as bankruptcy).

What Are the Two Types of Accounting?

Accounting methods are classified into two types: cash and accrual. 

Either method is suitable for the majority of small businesses. 

According to the IRS, businesses that are corporations or have gross revenue of more than $5 million per year must use the accrual method.

Cash Method 

The cash accounting method is the most basic. Revenue is recorded when money is received. According to the Houston Chronicle, when money is spent, an expense is recorded.

Accrual Method 

Revenue is recorded in accrual accounting when it is earned, not when money is received. A company can provide a service and bill with the client for it. Even if the client has not yet paid, revenue is recorded in the books.

Expenses in accrual accounting are matched to revenue, which means they are recorded at the same time as revenue. 

So, if a house painter needs to purchase paint for a job, the total income for the job and the cost of the paint are both recorded in the books. It makes no difference when the paint was purchased.

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