What Are the Three Major Areas of Accounting?
Accounting and finance are integrally connected for each business firm. Accounting is the study of how information is gathered and distributed inwards and outwards. Finance, is the study of how firms make the investments and financing decisions they make operate their business.
Finance relies on accounting information to operate, and accounting must have financial experts in order to translate accounting information for the general use. There are three major areas of accounting:
Financial accounting is where accounting deals with external parties interested in the business firm. According to the Financial Accounting Standards Board (FASB), it provides the most important financial collecting and reporting functions for business firms.
Financial statements produced for the benefits of your external investors. Investors need to be able to get the review of financial statements such as the income statement, the balance sheet, and the statement of cash flows in order to decide whether they should invest in this business firm or remain invested in the company, or not.
Financial statements are of interest to another group of external individuals- the creditors of the firm. Creditors are the bond-holders of the firm or they could be the debt-holders of the firm. Creditors are individuals who loaned money to the firm, and interested in receiving a return on their investment and, eventually, a return of their principal.
Managerial Accounting is where accounting associated with gathering and articulating the financial information for inside organizations such as managers and staff.
You may compare it to the financial accounting which is concerned with information for external individuals. The Institute of Certified Management Accountants states that management accountants are the ‘value creators’ among accountants, thereby taking their place between the finance people and the financial accountants in the business organization.
Managers use financial information to take better business decisions. They use a variety of techniques such as variance analysis, risk management, and cost-volume-profit analysis to predict the best forward-looking information as possible.
Some professionals consider Cost-Accounting as a part of Managerial-Accounting and some think that Cost-Accounting is a different functional area of accounting. Cost-Accounting and Managerial-Accounting surely overlap.
Cost-Accounting looks at the costs of production for a business by looking at the fixed costs of the products and services, they sell and their input costs. Input costs compared to output cost for the measurement and better understanding of the financial performance of a firm with directly regards to the production costs. Elements often used: indirect costs, or overhead, raw materials, as well as labor. Managers use the information from Cost-Accounting to establish the cost control programs for their business firms.
Why is accounting important?
Accounting is a deciding factor regarding the financial health of a business. Logging and tracking an organization’s financial data can help you find out a company’s cash flow, income and expenses. All of this information can be provided to stakeholders who have a direct impact on business operations. The more financial information you have about your company’s financial health, the better positioned you are to make decisions about your company’s future.
Types of accounting
Contrary to popular belief, accountants don’t only prepare taxes. Accountants can also investigate white collar crimes, audit businesses, or work exclusively in government and manufacturing environments.
Accountants can be CPAs (Certified Public Accountants) or perform bookkeeping and accounting tasks such as managing the accounting cycle at a small business or a large corporate entity. They can also work for a nonprofit or a large consulting firm.
Here are some of the different areas of accounting and what they entail.
Financial accounting is the process of compiling financial reports for external use. Financial accountants work with their colleagues and managers to strategize how a company can be more profitable. Also, they track all financial activity recorded in a ledger in addition to ensuring that internal procedures are being followed and that all financial activity appears on relevant financial statements.
They must abide by Generally Accepted Accounting Principles set for U.S. businesses and International Financial Reporting Standards if a company operates overseas. Overall, financial accountants need to have strong attention to detail to convey the current financial state to outside sources.
This type of accounting documents, monitors and assists in the financial planning of an organization. Their documentation is typically meant for internal stakeholders rather than the public. A managerial accountant must be careful in communicating confidential information and to whom. They work with their managers to analyze and create a budget to meet the needs of the short- and long-term goals of the organization.
Cost accounting can be seen as a subcategory of managerial accounting. Cost accountants are responsible for documenting, presenting and reviewing manufacturing costs. They oversee all variable and fixed costs to see if output aligns with the cost to produce a product. They also work with managers to decide on future decisions based on the financial forecast and the progress of production.
Internal and external auditing falls under the category of public accounting. External auditing is the action of a company providing financial statements to a third-party for financial feedback. In this instance, a third-party is a reliable source in describing if a company’s financial statement is a representation of GAAP.
Internal auditing determines the effectiveness of internal accounting processes. An internal auditor can review employee departmental responsibilities, management policies and approval procedures on related projects. In turn, they provide useful feedback that can help a company to become more profitable and efficient.
Tax accountants help businesses stay in compliance with annual tax codes when they file each year. They also assist companies in planning for future tax returns, such as avoiding certain tax burdens and understanding the implications of specific tax decisions. Usually, larger organizations will hire a tax accountant to navigate the complexities of financial records.
Accounting information systems
Accounting information systems, or AIS, manage the improvement of successful accounting procedures. Employees working in this field decide on the best times to install updated technology and monitor the progress of existing systems to determine if there is an increase in productivity over a given timeframe. They can make decisions in conjunction with the IT department to instill continuity with technological processes.
Fiduciary accounting is the procedure of trusting one individual to handle financial accounts. They’re obligated to serve on behalf of their clients for accounts tied to real estate, trust funds, investments and others. Also, they must give relevant financial information to their clients once a year, which includes a summary of all accounts, schedules of receipts, gains, losses and the assets they have at their disposal.
Forensic accounting requires accountants to reconfigure a company’s financial information when some information is missing or not available to review. The goal of forensic accounting is to gather all available documentation and accurately and comprehensively record all credit, debit and cash transactions in financial statements. These professionals often work on legal cases involving fraud, claims and disputes.
Public accounting refers to businesses that provide accounting advice to clients based on their needs. They can work in auditing, assist with tax returns, consult on procedures tailored to the installation of technology or computer programs and provide legal advice.
Government accountants manage the financial planning and allocation of resources to departments within a local, state or federal government. This type of accounting has standards that must comply with the Governmental Accounting Standards Board (GASB) who is responsible for developing consistent accounting procedures for local and state governments. They also monitor a government’s budget and allocate funds appropriately.