Accounting can be defined in terms of activity performed by an accountant. It has several types or branches based on activities or classes.
Let’s discuss the top 12 accounting branches and their main characteristics.
Accounting branches are types of accounting practices to record, measure, and analyze financial and non-financial data of a business.
Each accounting branch deals with specific accounting practices. The aim of these branches is to record the information and then make it presentable to different stakeholders of an entity.
As economies and businesses expanded globally, new laws and accounting standards were introduced. These factors combined with the growing needs of end-users of accounting information gave birth to new accounting branches.
We can expand accounting into several branches or types depending on the process, entity type, and regulatory requirements.
There are 12 common branches of accounting. The purpose of each accounting branch is to analyze the financial and non-financial performance of an entity from varying angles.
Financial accounting involves recording and categorizing business transactions. Its foundation is built on bookkeeping records and aims to transform raw data into presentable information.
Financial accounting follows principles defined by accounting governing bodies like the IFRS foundation and FASB. commonly followed accounting practices are defined as Generally Accepted Accounting Practices (GAAP).
Financial accounting generates data for external users of an entity usually. The users of this data include lenders, creditors, banks, regulatory authorities, and tax professionals.
Another key aspect of financial accounting is to generate financial statements of a business. These statements include balance sheets, income statements, cash flow statements, and equity statements.
The management and shareholders about investments, dividends, and financing decisions.
As the name suggests, the management or managerial accounting concerns the operations and management of a business.
Management accounting follows mainly the General Management Accounting Principles (GMAP) developed by the Chartered Institute of Management Accountants (CIMA).
Management accounting provides analysis through planning, budgeting, costing, and forecasting tools to name a few.
Since financial management is primarily used by internal stakeholders of a business, it does not over-emphasize compliance with regulatory requirements.
Management accounting does not exclude compliance, risk, and governing aspects of a business though. However, it is concerned more with the strategy, operations, and management of an entity.
Cost accounting is primarily concerned with the costing decisions of a business. It is mainly used by manufacturing or businesses selling products.
However, it can be used by service businesses as well. The aim of cost accounting is to determine the right cost and then make informed decisions about pricing.
Cost accounting also helps businesses to differentiate between variable and fixed costs. Each component of the total cost then helps management to determine the right selling prices.
Cost accounting then relates to the production process, operational efficiency, waste reduction, maximizing resources, and improving the profitability of a business.
Tax accounting is all about planning and compliance with tax regulations. It has two objectives; compliance and tax savings.
Tax accounting aims to maximize tax savings through legal means. It concerns tax policies and regulations set forth by regulators.
Businesses need to balance the practices of compliance and tax savings. The compliance segment concerns local, state, and federal taxes.
It also concerns sales, income, and other types of taxes for a business. At the same time, it aims to maximize the tax-saving benefits for the business as well.
Forensic accounting deals with legal and compliance matters of an entity. It is concerned with the detection and prevention of fraud, embezzlement, and malpractices in an organization.
Forensic accounting combines auditing, accounting, and investigative skills for financial and non-financial practices.
Forensic accountants utilize their investigative skills to analyze financial statements, bookkeeping records, financial transactions, and other documents to unearth any wrongdoings.
They also provide feedback on their findings to auditors and management for planning purposes.
The evidence collected by forensic auditors is used in legal proceedings and courts as well.
Auditing is a branch of accounting that ensures an entity complies with the internal policies, regulatory framework, and tax requirements.
Auditing is divided into internal and external auditing segments. Both types of auditing segments ensure compliance and accurate reporting.
Internal auditors ensure an entity complies with internal controls, governance models, policies, and regulatory requirements.
It analyzes the financial statements of an entity to comply with taxation and other regulatory requirements.
External auditing ensures the management of the entity is complying with the company procedures and making the best decisions in the interest of the shareholders.
External auditing is performed through independent auditors appointed by a government entity or regulatory authorities.
As the name suggests, project accounting is related to specific projects undertaken by an entity.
The primary concern of project accounting is to analyze the financial feasibility, progress, and cost analysis of a project.
Project accountants also monitor the progress of a project to ensure financial controls. They report to the top management of the company.
A key aspect of project accounting is to analyze historic data and provide useful insights to the top management for future planning.
Fund accounting is a branch of accounting that is used by not-for-profit entities. It does not relate to the profitability or reporting compliance of an entity.
Fund accountants examine the amount dedicated to a specific project undertaken by the not-for-profit entity or an NGO.
Non-profit entities may use several fund accounts to manage different projects. They can also prepare different financial statements.
Fund accountants also have to ensure the progress of each project within the financial constraints of the non-profit entity.
Public accounting refers to the practice of providing accounting and auditing services to other entities. These services may be offered to individuals, businesses, and non-profit entities.
Public accounting ensures compliance, risk assurance, financial statements auditing, tax compliance, and other regulatory framework compliances.
Public accounting firms specializing in accounting also provide consultation services to their clients.
Public accounting is closely related to auditing, assurance, governance, and risk compliance of private and public companies.
Governmental accounting practices ensure the accountability of local, state, and federal institutions.
The prime task of governmental accounting is to make sure the resources are allocated and spent objectively. It is performed through a team or institution of auditors and accountants.
Since a government allocates resources to different departments and institutions, accountants analyze and examine the financial records of these entities.
Key areas of governmental accounting include education, healthcare, housing, and defense to name a few.
Fiduciary accounting relates to providing accounting and auditing services to trusts, estates, and receiverships.
Its primary concern is to examine the entrusted accounts to a firm or person for managing property, wealth, cash, and investments.
Therefore, it is related to managing accounts on behalf of another person or business. The aim is to ensure transparency and the transition of property/wealth entrusted by the entity or authorized person.
A major part of fiduciary accounting is to analyze the receipt and disbursement of income to guardians or custodians of the fund.
Social responsibility, or simply social accounting, is an emerging account that concerns an entity’s social, environmental, and governance impacts.
Social accounting is unlike other accounting branches and goes beyond the conventional approach of examining the financial statements of an entity.
It measures the impact of commercial activities, policies, and projects businesses and corporations undertake.
Government entities and non-profit organizations undertake social accounting. They aim to protect the community by measuring the impact of commercial projects, activities, and development projects.