As a business owner, you need to keep track of your company’s finances. From providing an overall snapshot of your business’s financial health to simplifying your annual tax filing, accounting can help provide the information you need. While financial apps can be helpful for day-to-day financial management tasks like expense tracking, a skilled accountant can provide more detailed insights.
Generally, accounting refers to the process of gathering, analyzing, and reporting financial data. However, there are different types of accounting, each with its own objective. Many accountants specialize in one area, such as bookkeeping or tax return preparation. Understanding the branches of accounting can help determine which specialist to hire for your business.
This article provides an introduction to the different types of accounting commonly used by business owners and shares insights into which types of specialists to consider hiring for your company.
- Importance of understanding different types of accounting
- The different types of accounting
- Specialized accountants vs. general accountants
Importance of understanding different types of accounting
Recognizing the distinct types of financial accounting can help you match the right professionals to specific business needs. We explore some reasons for understanding their differences.
- Informed decision-making. A clearer picture of the business’s financial health allows managers to make data-driven decisions and propel the business forward. Managerial and cost accounting can assist with identifying wasteful practices to ensure better allocation of resources, which increases efficiency and reduces costs.
- Compliance and transparency. Financial, tax, and governmental accounting ensure compliance with various regulatory bodies. Compliance activities include fulfilling tax obligations and adhering to industry regulations. Businesses that prioritize compliance can avoid penalties, build trust with stakeholders, and maintain a clean financial reputation.
- Risk management. Regularly auditing a business is a proactive way to detect fraud, inefficiencies, and irregularities. Forensic accounting can help companies dig even deeper to uncover these details. Auditing and forensics ensure accuracy and preserve long-term financial health. They also deter fraudsters as they recognize the higher chance of getting caught.
- Global operations. Expanding into overseas markets brings new financial risks and introduces new regulations. International accounting experts help managers identify, understand, and implement applicable accounting standards. They can also simplify cross-border transactions by eliminating redundancies and reducing complexities.
- Strategic planning. Finances are critical in any type of strategic planning. For example, cost accounting influences the pricing strategies a business may pursue. Similarly, effective tax planning can dictate how a company pays its employees or even the products it sells and its markets.
- Investor relations. Financial accounting helps organizations create and maintain trust with key stakeholders through transparency and accuracy. Managers inspire this confidence by producing well-maintained financial records that speak to the core areas that existing and new investors want to review.
The different types of accounting
Broadly speaking, accounting refers to the process of gathering, analyzing, and reporting financial information. A company might use this data to gain internal insights into its financial health. It could also use this data for reporting to external parties—such as potential business investors, regulatory agencies, or tax collectors.
Each type of accounting has its own distinct purpose. A professional specializing in a given accounting field will use specific tools and techniques (such as accounting software) to achieve that niche’s given goal. As a business owner, you can hire experts with distinct specialties to achieve your objectives.
Let’s go over some common accounting types a business may need.
- Financial accounting
- Managerial accounting
- Cost accounting
- Tax accounting
- Forensic accounting
- Governmental accounting
- International accounting
1. Financial accounting
Financial accounting involves capturing and summarizing a business’s financial transactions and creating reports to provide a clear overview of those business transactions.
Financial accountants also generate financial records that provide valuable information about a company’s fiscal health, such as balance sheets, cash flow statements, and income statements. Financial accounting is focused on past performance, not the future.
The statements created by financial accountants are useful for internal purposes, providing businesses with a snapshot of a company’s performance. Creditors and tax authorities like the Internal Revenue Service (IRS) may request such statements in audits. Finally, companies that are traded publicly must issue statements in line with the International Financial Reporting Standards (IFRS) that investors can access.
Since a company’s financial statements can be used for official purposes, financial accounting experts must stick to strict guidelines as outlined by the Generally Accepted Accounting Principles (GAAP). These guidelines ensure consistent financial reporting across companies and are set by the Financial Accounting Standards Board (FASB).
2. Managerial accounting
The management accounting method is used by businesses to gain greater insights into a company’s operations. Since managerial accounting is strictly focused on providing accounting information for internal use, it doesn’t have to stick to the same strict GAAP guidelines as financial accounting. Instead, it focuses on things like financial analysis, budgeting, and cost analysis.
By analyzing past financials and forecasting future outcomes—for example, how much a company could cut expenditures by switching software providers—managerial accountants provide business owners with the data they need to make savvy business decisions. Generally, the emphasis is on strategic management, risk management, or performance management.
Techniques commonly used by management accountants include margin analysis, capital budgeting, and constraint analysis. Trend analysis—which identifies patterns in business expenditures over time—is also useful.
The primary goal of managerial accounting is to improve business outcomes by ramping up profits and minimizing losses.
3. Cost accounting
Cost accounting is considered a subcategory of management accounting, focusing specifically on a company’s cost of doing business. This is used explicitly for internal purposes, helping determine how to reduce costs and increase profit margins. Companies may hire cost accountants to determine how to streamline overall operations.
Cost accounting is particularly useful in manufacturing environments. It takes into account various expenditures, including fixed costs and variable costs, including from sources like commercial rent, materials costs, and labor expenses. The aim is to ensure the cost needed to produce a good (the cost per unit) is reasonable. If not, business owners can strategize on how to lower costs.
There are different types of cost accounting methods, each with its own focal point. For example, activity-based cost accounting considers all activity needed to produce a company’s goods or services, while lean accounting focuses on eliminating waste.
Meanwhile, standard cost accounting compares the actual cost of producing goods to the total costs theoretically needed to produce those goods, and marginal cost accounting calculates fluctuations in the cost of production.
4. Tax accounting
Tax accounting ensures a business, nonprofit, or individual abides by applicable tax laws and regulations. In the U.S., tax accountants operate according to guidelines set forth by the Internal Revenue Code (IRC), which helps ensure a level playing field across all taxpayers in the country.
When working with a business, a tax accountant’s primary goal is to ensure the entity accurately calculates and reports its tax liabilities. Proper tax preparation can help a company avoid errors on their tax paperwork that can result in getting an audit from the IRS—a time-consuming and potentially costly process that small businesses want to avoid.
A tax accountant has in-depth knowledge of applicable tax laws, which vary at the state and federal levels, and can help business owners navigate these complex guidelines. A tax accountant can also support future tax planning, finding ways to avoid unnecessary tax burdens.
For example, if a business owner doesn’t claim all possible expenses, they’re paying more taxes than needed. Claiming additional deductions can lower the company’s overall profits, resulting in a lower tax bill.
Auditing is a type of accounting that provides an independent analysis of a business’s financial activity. By objectively tracking and reporting all activities, auditing ensures the company abides by relevant regulations and best practices.
Auditors are never directly involved in the organization that they audit. After reviewing financial records, they create an in-depth audit report detailing their findings.
An audit can be external or internal. Internal auditors aim to determine how effective a business’s current accounting processes are. This can help a company improve financial planning by identifying potential wasted resources, mitigate the risk of fraud, and avoid mismanagement. External auditing involves reviewing a company’s formal financial statements, ensuring they’re prepared in line with GAAP.
The IRS also conducts audits to ensure a company’s accounting records comply with tax laws. Proactively initiating an audit can help a company avoid an IRS audit in some cases. For example, investigative internal auditing initiated by a company can reveal mismanagement on the part of executives, allowing the business to remedy the situation and avoid criminal penalties.
6. Forensic accounting
Forensic accounting investigates discrepancies and fraudulent activities. It uses a blend of auditing, accounting, and investigative skills to analyze and interpret business data.
Forensic accountants are often used in legal disputes to detect and provide evidence of fraudulent activities. Accounting firms, law firms, banks, government agencies, and insurance companies rely heavily on their services.
One of the primary roles of a forensic accountant is to act as an expert witness in court cases. They use their expertise to dissect complex financial data and present it in a way that judges, juries, and attorneys can understand. They can assist in various types of cases, including embezzlement, money laundering, and other financial irregularities. Their ability to unravel complicated financial transactions makes them invaluable in these situations.
The skills and tools used by forensic accountants also play a key role in cybercrime detection and prevention. Forensic accountants can help trace the source of cybercrimes, such as identity theft and online fraud, and provide evidence for prosecution.
7. Governmental accounting
Governmental accounting focuses on the financial operations of government entities. The primary purpose is to ensure transparency and accountability in the handling of public funds.
Governmental accountants meticulously track revenues and expenditures. They adhere strictly to budgets and produce detailed records that accurately reflect the public entities’ financial health.
Other fields of accounting use GAAP or IFRS, but governmental accounting operates under a unique set of standards set by the Government Accounting Standards Board (GASB). These standards address government entities’ unique needs and responsibilities with a strong emphasis on public accountability.
One of the key differences between GAS and GAAP or IFRS is the purpose of the financial records produced and how that affects their creation. Governments need documents that show accuracy, reliability, and compliance. Businesses use GAAP and IFRS to produce financial records necessary for decision-making. Also, while GAAP and IFRS use the accrual basis for accounting, GAS uses a modified version of accrual accounting.
Governmental accountants serve various local, state, and federal government entities. Their work is crucial in ensuring these entities operate within their budgets, responsibly manage public funds, and comply with all relevant financial regulations. They play a vital role in maintaining trust in public institutions by promoting financial transparency and accountability.
8. International accounting
As businesses expand globally, they’re confronted with different accounting standards and practices across countries. They must also account for exchange rate fluctuations and international tax issues.
One of the significant challenges is the difference in accounting standards across countries. For instance, the United States uses GAAP, while many other countries adopt the IFRS. Differing standards can create complexities when consolidating financial statements for multinational corporations.
International accountants play a crucial role in navigating these complexities. They consolidate financial statements from global subsidiaries, which involves converting foreign currencies and reconciling different accounting standards. These professionals also manage the impact of exchange rate fluctuations on the company’s financial performance and position.
Additionally, they manage international tax issues, ensuring compliance with the tax laws of each country where the company operates. International accountants play a crucial role in cross-border transactions and mergers and acquisitions by providing insights into the financial health of potential partners or targets. They also ensure the financial aspects of these deals align with relevant accounting standards and regulations.
Specialized accountants vs. general accountants
Many accountants specialize in one area of expertise. By focusing their knowledge on the techniques and technologies used in that niche, they can provide more detailed, accurate, and efficient analysis and reporting to meet that field’s primary objective. As a business owner, hiring a specialist is often preferable to hiring a general accountant.
How can you find a certified public accountant (CPA) with the expertise you need? Look for people with credentials that go beyond general accounting. You can find accounting professionals on Upwork who specialize in everything from financial to management accounting services and more. These individuals will have the unique skills required to fulfill your needs.
Hire the right type of accountant for your business
The various types of accounting can help your business in many ways, from ensuring accurate tax preparation to informing savvy financial decisions. At one point or another, you’ll likely need at least one accounting specialist to help your company succeed.
You don’t necessarily have to pay for a full-time team or hire a pricey accounting firm to meet your business’s accounting needs, either. Look for the experts you need on Upwork and leverage a global pool of independent, specialized talent.
You can browse accounting professionals according to details like cost and previous experience, enabling you to find an accountant with the credentials you need.
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