Branches of Accounting: Purpose and Types
Different branches of accounting came into existence with time based on the requirements of stakeholders in different industries. While financial accounting, cost accounting and management accounting are the main branches, there are other accounting branches as well.
In this article, we will be discussing the branches of accounting and understanding the areas of operations as well.
Table of Contents
What is Accounting?
Accounting is the process of measuring, analyzing, and processing business-related information. Through accounting, organizations can efficiently perform financial management. Through accounting, they can manage their cash flow and smoothly operate a business. Accountants, bookkeepers, and chartered accountants are accounting professionals.
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Different Branches of Accounting
Accounting branches are different types of accounting that help in recording and sharing appropriate business-related transactions with stakeholders. These branches of accounting follow GAAP which is a standard formulated and regulated by FASB.
Branches of Accounting utilize various accounting practices for monitoring and reporting the financial status of the company. Organizations observe uniformity by following conventions and principles stated in GAAP. Let us now discuss each branch of accounting in detail.
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1. Management Accounting
Management accounting is also known as managerial accounting. It is a branch of accounting meant for the organisation’s internal use. Management uses the information provided by management accountants to make business-related decisions. Since this accounting branch is meant for internal purposes, there is no necessity to follow GAAP rules.
Accountants focus on assessing the finances of the company in a way to increase the company’s revenues and profit. They also work towards cost reduction, budget planning, and internal examination through break-even point analysis (BEP) or cost-to-volume profit (CVP). Management accounting functions include forecasting and planning, organizing, performance variances, coordinating, etc.
2. Financial Accounting
In this accounting branch, accountants summarize, analyze and report business-related financial transactions. This involves the preparation of financial statements that are available for public use as well. Stakeholders, government agencies, regulatory authorities, and financial institutions use this information. Since financial accounting deals with documenting information for public use, this branch of accounting follows GAAP and IFRS.
GAAP is for the financial accounting used in every jurisdiction. IFRS governs how transactions and financial events should be reported within financial statements. Through financial accounting, business transactions are recorded systematically and summarized logically for analysis and interpretation.
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3. Cost Accounting
It is an accounting branch that recognizes, classifies, allocates, and reports costs as well as compares them with standard costs. The aim of cost accounting is to help management in optimizing business processes based on cost efficiency.
Through cost accounting, management can gain detailed information on cost so that they can manage business operations accordingly. Cost accounting professionals analyze actual costs over budgets on a regular basis to determine monetary actions in the future. Compared with financial accounting, it can be made flexible with guidelines based on the decision of the company’s management.
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4. Forensic Accounting
Also known as legal accounting, forensic accounting is one of the branches of accounting that deals with auditing and investigations of financial systems. Forensic accountants audit financial records to gather legal evidence against financial crimes such as embezzlement and fraud.
They also perform due diligence reviews, trace funds, identify assets and even conduct asset recovery. Insurance industry hires forensic accountants to determine whether an insurance claim is genuine and to establish damages from such claims.
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5. Tax Accounting
It is one of the branches in accounting that deals with tax payments and tax returns. This branch operates differently at individual and business levels. Tax accounting deals with qualifying deductions, donations, investments, and income for individuals. Businesses require more in-depth analysis of how funds are being spent and whether they are taxable.
This branch deals with tracking funds associated with business entities and individuals. Even when an organization has been exempted from tax, it is still necessary for businesses to go through tax accounting. Tax accountants calculate income and other taxes depending on the business’s structure.
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6. Fiduciary Accounting
In this branch of accounting, trust or estate-related transactions are recorded. Periodic reports on the status of the entity are also issued. Fiduciary accounting deals on a cash basis, where cash is recorded when received. Distributions and disbursements are recorded when they are paid.
Accountants determine whether disbursements and receipts should be assigned to the principal or income in this accounting branch. This is clarified through the trust document or as per the rules mentioned Uniform Principal and Income Act.
7. Auditing
Auditing is an unbiased inspection of the financials of any business entity by professionals called auditors. In the case of internal auditing, companies can identify and prevent probable tax issues before an external audit. In internal audits, shareholders select the auditors to avoid conflict of interest.
Through audit, companies ensure that their books of accounts are properly maintained while being compliant with the law. For a fair examination, external auditors such as CPA inspect a company’s financial reports. Statement of changes in equity, balance sheet, cash flow statement, and notes comprising accounting policies are examined in audits.
The actual financial position of a company becomes evident after a thorough audit. After this examination, two important questions can be answered factually. Whether assets and liabilities are properly recorded in the balance sheet and if profit and loss are properly assessed.
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8. International Accounting
International accounting plays a crucial role in global business and finance. It allows companies operating in different countries to prepare and present their financial statements consistently and understandably. This makes it easier for investors, regulators, and the public to compare and analyze the financial performance of companies from different countries. International accounting helps to promote transparency and accountability in global business operations. By adhering to internationally accepted accounting standards, companies can demonstrate their commitment to good corporate governance and ethical business practices.
9. Public Accounting
Public accounting is a branch in accounting in which accountants prepare financial documents to help businesses and individuals regarding their tax requirement. There are firms that hire accountant that offer services on local, national and international level. CPAs are the ones who perform public accounting tasks. This includes preparing tax returns, consultation related to use of accounting systems, audits and business evaluations.
For those who work as public accountants, skills including tax preparation, financial reporting, financial statements, knowledge of IFRS and GAAP standards are required. After acquiring public accounting skills, one can plan to become a tax accountant, staff auditor, tax consultant as well as tax manager.
10. Government Accounting
This accounting branch focuses on the financial management and reporting requirements of the public sector entities. This involves application of accounting principles for tracking and managing public funds. Through this accounting branch, one can ensure transparency and compliance with regulatory frameworks. It involves recording, categorizing and reporting financial transactions of government activities. Many public sector companies also use government accounting standards to ensure consistency within the system.
11. Fund Accounting
This is a subset of accounting to record resources with its use limited by the governing agency, grant authority, donor or by law. This accounting branch focuses on accountability instead of profitability. Fund accounting is mostly used by government or non-profit organizations.
Fund of fund accounting are categorized in two classes. One with unrestricted use and the other one with restricted use. While using fund accounting, an organization can separate financial resources into the funds instantly available for ongoing operations and the other part of the fund for donor-specified reasons.
Purpose of Having Different Accounting Branches
There are different branches of accounting that have specific purposes in accounting. Organizations use a particular accounting branch according to the requirement and business model. By choosing the appropriate accounting branch, organizations can:
- Collect, compile and report financial reports to stakeholders, regulators, and tax collectors
- Maintain financial records in an accurate and orderly manner
- Measure and assess the results of economic activities within the business
- Assist financial analysts and stakeholders in making wise business decisions
- Monitor the financial status of the business using financial analysis
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FAQs
What is the role of financial accounting?
Recording, compiling, and reporting the flow of transactions resulting from business operations across time is the task of financial accounting. Financial statements including balance sheet, income statement, and cash flow statement, are prepared by summarizing these activities. What is cost accounting and why is it important? Cost accounting is a branch of accounting that deals with recording, classifying, allocation, and reporting of current and prospective costs. This information helps the management in the process of planning, controlling, and decision making. What is the role of auditing in accounting? An organization's financial records are examined during an audit to see if they are accurate and compliant with all applicable rules (including recognized accounting standards), regulations, and laws.
How is management accounting different from financial accounting?
Management accounting is focused on giving information to an organization internal stakeholders for decision-making, whereas financial accounting aims to provide information to external stakeholders such as investors and creditors.
What is the purpose of tax accounting?
Tax accounting focuses on preparing tax returns and tax payments. It involves understanding the current tax law, planning for future tax obligations, and ensuring compliance with tax regulations.
What is forensic accounting?
An accounting speciality practice area known as forensic accounting is used to characterize engagements that come about as a result of actual or impending conflicts or litigation.
What is governmental accounting?
Governmental accounting is the practice of documenting and managing all financial activities carried out by the government, including its revenue and outlays.
What is an Accounting information system (AIS)?
AIS is a system in accounting which is used by companies for collecting, storing, processing, managing, retrieving and reporting financial data. This information system is used by consultants, business analysts, accountants, managers, auditors and regulators.
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