definition backgroundUnderstanding the different types of accounting: What and why?

Understanding the different types of accounting: What and why?

By Kishana CitadellePublished: 10/22/21

To take on any type of accounting, whether it be for your studies or for your business, one must first understand its meaning, then the types of accounting that exist.

It is a field, that is very important, required by law, that tolerates no frauds, miscalculations or misrepresentation of your business or, you engender the risk of huge damages.

So, to avoid such horrors, let’s dive into the basics and types of accounting

What is accounting?

Accounting is the analysis, summary and report of the company’s financial system and transactions to be overseen and evaluated by regulators and tax authorities.

Accountants keep record of the company’s finances to assemble in balance sheets, income statements for tax season and investors’ knowledge of the company’s financial standing.

Why are there different types of accounting?

Though there are many rules and regulations to respect when it comes to accounting, many work fields, and economy exist.

Because many work fields and industry have developed and each serve their different purposes in society, accounting had to categorize accounting careers to recognize the industry it is related to. Hence, the birth of different types of accounting.

What are the golden rules of accounting?

Every stakeholder must have access to every economic entity’s financial information, which ought to be correct and represent the true image of the business.

So what is the golden rule, you ask?

First, as accounting typically falls into a category, it is essential to take a look at the types. They go by the name of 3:

  • Real account
  • Personal account
  • Nominal account

Real accounts

They are assets or properties’ dealings and additionally categorized into tangible and intangible real accounts.

Tangible real accounts: Obviously correspond to physical and touchable assets like buildings, cash, inventory etc.

Intangible real accounts: Are the total opposite of physical and touchable. It concerns the abstract such as Trademark, Copyright, etc.

Both real accounts follow debit, what comes in and credit rule, what goes out.

Personal accounts

It is people focused where you have human beings accounts management and others known as artificial people, such as firms, companies, persons association.

It follows the credit and debit rule, where credit represents the giver and the debit, the receiver.

And finally, you have the

Nominal accounts

Which involves income and expenses. The rules they respect are credit, indicator of all the company’s expenses and losses and debit, representation of the incomes and gains

What are the different types of accounting?

There are different types of accounting for every type of business aspect.

Here are the types of accounting:

Financial accounting:

Is to prepare financial statement by recording business transactions. In the US, the financial accounting falls under the Generally Accepted Accounting Principles, known as GAAP whereas in most countries, the accounting process that is used is the International Financial Reporting Standards.

The analysis is done with the help of an accountant, who verifies the company’s financial situation by inspecting the balance sheets to recommend changes to management that should be made for loans and keep investors informed on investments, if any.

It is the financial representation of the company when it comes to creditors suppliers, banks, regulators, etc. It is the company’s financial identity and should never be neglected.

Cost accounting:

It deals with costs evaluation, the cost of doing business. Mostly used for internal purposes and in the manufacturing industry, in terms of determining the cost of a project, other businesses do apply it as well.

This type of accounting’s job is to help oversee the cost of a project and budget management to see how to reduce or increase product production cost. It is essential to prevent project waste by controlling cost.

The type of cost can either be a fixed, which remain the same, or a variable cost, which changed according to any additional item that may have added because it was needed. They look like this:

Fixed cost examples:

  • Property Tax
  • Salaries
  • Rent

Variable cost examples:

  • Materials
  • Shipment
  • Supplies

Management or managerial accounting:

Also used for internal purposes than for the public, by supplying information to the company’s management, it is the surveillance of the company’s money use rather than the extent of money use.

Unlike financial accounting, it doesn’t so much as adopt GAAP, as the Global Management Accounting Principles (GMAP), was created for this purpose. It was created to increase the company competence and profitability.

There are 3 types of management accounting, which are:

  • Strategic management: the accounting collects all the data that needs to be studied to present it to management, to see for one, that it is accomplishable and for 2, that a strong strategic way to improve the company’s accounting comes out of it.
  • Performance management:Is to examine the company’s financial performance over a period of time and analyzing the reason behind it, precisely observing the employee’s work and giving them feedback to improve.
  • Risk management: as its name reveals, is to assess the risk that the company can encounter and evade them at all cost. It usually includes accounting, presenting those risks to board of directors and suggesting methods to get rid of them.

Governmental accounting:

Deals with overseeing state and federal funds for, for example, healthcare and education allocation and expense and following the Governmental Accounting Standards Board.

There are 5 governmental funds:

  • General fund: revenues the states earns from taxes, fees, etc.
  • Permanent fund: governmental fund
  • Special revenue fund: account allocated for the collection of money to be used for a definitive project.
  • Capital projects fund: to account for the financial resources used to amass a huge capital asset.
  • Debt services fund: cash reserve kept for emergency funding needs

Fund accounting:

Mostly concerned with ensuring that non-profit organizations get the proper funds they need.

This type of accounting deals with funding:

  • Charities
  • Churches
  • Hospitals
  • Educational institutions

Auditing:

It is where auditors investigate and monitor companies’ finances to see that they are accurate and in compliance with the rules and regulations of the tax laws. If not, then penalties must follow.

There are external auditors for federal and state auditing that examine the company’s finance and internal auditors for shareholders that prepare the company for the external audit.

Tax accounting:

This field is to advise companies when preparing for tax season, after reporting on the impact to decrease tax levels. It is directed under the state and federal tax rules and the Internal Revenue Code.

Accountants work with businesses, taxpayers to see that their tax report is correct and, if not, point them in the right direction.

Fiduciary accounting:

It manages the accounts of those having custody of or managing property. The bank tracks all activities from the account to verify if that the funds are being used and properly.

This accounting deals with:

  • Trusts
  • Estates

Forensic accounting:

It involves nothing other than the investigation of bankruptcy, fraud, embezzlement cases, etc. It usually requested by professionals like attorneys, cops and banks.

You can find in the milieu of:

  • Lawyers
  • Law enforcement
  • Insurance companies
  • Government organizations
  • Financial institutions

There are so many that we could forever be stating types, but you have read the main types. We hope that this article will have been served its purpose.

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