Business Accounting Branches: Their Applications and How They Work

How to get the most out of your business accounting and understanding the other branches of business accounting.

Business success largely depends on how efficiently each department works. Every department has a responsibility to make the best use of resources and achieve business goals. Financial accounting services deal with finances and costs. The department is further divided into accounting branches that work on a specific framework. Firstly, we will discuss different types of accounting and then venture into details of the verticals and their functions.

  1. Financial accounting: This is done for investors since it helps understand the company’s financial stability and potential. It helps in maintaining transparency as larger businesses aim to comply with GAAP.
  2. Tax accounting: Every company needs to fulfill the tax regulations framed by the government. In case of any gaps, companies can face serious problems in the future.
  3. Management accounting: This accounting provides a base for future decisions. It involves financial statements and analysis. This segment covers reports like costing, balance sheet, cash flow projection, budgets, profit, loss, etc., which are covered in this segment.

Understanding the 8 Branches of Accounting

The different types of accounting are also classified as branches where teams are responsible for taking care of specific tasks. The branches are broadly categorized into 8 types and are listed below:

1. Functional Accounting

This branch is responsible for recording and classifying every business transaction. Professionals use software for all tasks; however, this does not reduce human involvement.

The data like income statements, financial statements, balance sheets are basic accounting concepts, and they should be as per GAAP (Generally Accepted Accounting Principles). Therefore, every company should follow the laws laid by the government.

2. Managerial Accounting

This branch offers accounts solutions related to business operations. Managers use the data for making decisions. Some components of managerial accounting are:

  1. Budgeting and forecasting
  2. Evaluation of past business decisions
  3. Financial analysis
  4. Cost analysis

There are various online software businesses can use to make useful reports. This makes decision-making an easy process.

3. Cost Accounting

When we talk about different types of accounting, cost accounting is one vertical which is usfull for the internal assessment of operations. The manufacturing industry extensively uses this branch since they need to simultaneously manage huge resources and costs. This accounting broadly involves two types of costs:

  1. Fixed costs – Costs that remain unchanged and constant, like rent.
  2. Variable costs – Costs that are function-specific like logistics.

The most focused branches of accounting is forensic accounting. It deals with the legal aspects of finances like frauds, legal disputes, claims, or legal affairs. Forensic accountants are the professionals who deal with such cases. It is an assurance that the financial records are dead on target to get the right solutions.

4. Auditing

Auditing is the branch accounting questions and solutions performed at two levels; internally and externally. This branch is of utmost importance since it helps understand the business condition.

  1. Third-party experts usually perform external auditing– They review the financial data rendered to them by the in-house team and check them closely to find out loopholes.
  2. Internal auditing– Internal audit, as the name suggests, aim is to eliminate fraud, wastage, or negligence of resources. Therefore, it involves a thorough study of duty allocation, company policies, and accounting tools used by the company.
  3. Tax accounting

Tax accounting deals with tax calculation, data preparation, and tax return filing. Every government has defined policies for taxation depending on the nature of business and its scale.

5. Accounting information system

This branch involves the bookkeeping and accounting resources of a business. It is essential to adopt software that facilitates accounting management for seamless business operations.

As a business grows, the processes involved get complex. This is where well-designed software can be of great use. A company should adopt the latest software for all tasks with changing technology.

There is a difference between bookkeeping and accounting, which people usually misunderstand to be the same. Bookkeeping is the foundation of accounting. It is a part of the accounting system. Accounting is the interpretation and communication of data as reports that management can use for making decisions.

6. Fiduciary accounting

Same as a professional who acts on behalf of a business owner. A fiduciary accountant should work in favors of his client’s interests. Financial advisors, accountants, board members, money managers are all entitled to fiduciary responsibility.

Methods Used Based on Accounting Type

Accounting can also be classified as per the method used in the business. Following are the two categories:

  1. Cash accounting: This accounting is useful for small-scale businesses as it is simple and accurate. Here, revenue and expense are recorded only when an actual transaction occurs. The expense is incurred when money is spent, and income is recorded when cash flows in.
  2. Accrual accounting: Here, revenue is documented when it is earned or agreed between two parties, which means that the client will pay in the future. The company will raise a bill as per the agreement and perform the service. Expenses are recorded to match the revenue. Hence, companies consider the cost of resources.

Key Takeaways

Every company owner should be aware of different types of accounting to have a clear understanding of the business working. Finance and accounting are important as future decisions completely depend on the funds available for expansion. Hence, a transparent, accurate accounting system is a must for a company’s growth.

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