The Different Types of Accounting
For business owners, partners, or company directors, enlisting an accountant's services ensures profitability and tax compliance. Various accounting methods and specialties exist, each with specific features relevant to different businesses. This article offers a concise introduction to common accounting types, enhancing your familiarity with these methods and their benefits for your business.
Common types of accounting
While there are many different types of accounting specialities, in business there are five main accounting methods that are commonly used. These are:
- Financial accounting
- Management accounting
- Tax accounting
- Forensic accounting
Once every fiscal year companies and limited liability partnerships are required to produce accounting records such as the balance sheet, the profit and loss income statement and the cash flow stamen. Auditors are types of professional accountants who specialise in making sure that these reports are accurate and that a particular company or partnership’s financial procedures are legal and above board.
Auditing requires a thorough and painstaking approach as the auditor must inspect everything from physical inventories to receipts to spreadsheets and reports. Auditors can perform internal audits, meaning that they are employed by the company they are auditing. They can also perform external audits, where the auditor is a third party and not employed by the company.
Financial accounting is often viewed as the traditional role of an accountant. It is what most people think of when they envision the role of an accountant in a company. This specialisation encompasses all the bookkeeping tasks and procedures that are involved in operating a business.
A financial accountant will keep a close track of a business’s expenditure and revenue and make sure that all financial records are kept in order. They will draw up a chart of accounts, create journal entries in the general ledger and subledgers, and prepare the financial statements at the end of the fiscal year or the end of an accounting cycle.
There are two methods of financial accounting: cash accounting and accrual accounting.
As the name suggests, cash accounting deals with all business transactions made using cash. With this method, an accountant only debits and credits the balances in the cash account of individual journal entries. Using this method, transactions are recorded only when debts are paid or when monies are received. Any transactions that do not involve cash are not included in the records and are not part of the financial statements.
Accrual accounting uses the same method as cash accounting but also takes into account other types of transactions. All revenue and expenses are recorded when they occur, not when they are paid. In other words, when an invoice is issued but not yet paid, it is still recorded with the accrual method.
Management accounting – also known as managerial accounting - can be thought of as being similar to financial accounting. Like financial accounting, management accounting is focused on tracking and recording the financial situation of a business. The difference is that management accounting is geared towards helping management make decisions to maximise profits rather than just providing a summation of the financial position of the business.
Financial accountants produce statements and documents that can be used internally or externally and may be open to public scrutiny. Whereas management accountants produce statements and documents that are only for internal use.
A management accountant will analyse all areas of the business to form recommendations on what can be changed to improve profits. They will compile charts and graphs that provide data that senior management can use to make informed decisions about the direction of a business.
Management accounting requires the accountant to do more than simply crunch numbers. They must be able to interpret trends, analyse market information, make predictions on future market conditions and assist in developing strategies on where the business should be heading in the future
Tax accounting is based on taking care of a business’s tax liabilities. A tax accountant focuses on ensuring that the business or individual they work for is meeting all of their legal obligations as required by His Majesty’s Revenue and Customs (HMRC).
A tax accountant will calculate how much tax a business is required to pay and ensure that payments are made on time. They will be involved in tracking all transactions required to prepare the annual tax return and create the three major financial statements – the profit and loss income statement, the cash flow statement and the balance sheet.
A tax accountant will also scrutinise tax laws and the business’s finance to see if there are ways of minimising the tax obligations of the enterprise. Tax accountants must keep up to date with all changes in tax legislation, be able to solve complex problems and be highly skilled at interpreting large amounts of complicated financial data.
A forensic accountant is a type of financial detective. Forensic accountants use a variety of accounting methods to uncover illegal or unethical behaviour. In the business world, a company may use the services of a forensic accountant to detect instances of fraud or embezzlement.
A forensic accountant must be methodological, have a good understanding of the law and be able to prepare documents and financial analyses that can stand up to scrutiny in a court and be understood by a jury of laypeople.
Does your business need an accountant?
Not all businesses require the services of an accountant. If you are a sole trader or involved in a small company or partnership, then you may be able to manage all your financial accounting responsibilities and reporting on your own.
It must be said, however, that employing the services of a professional accountant will ensure that your business’s financial data is correct, that your tax affairs are in order and that you are operating your enterprise according to the best accounting standards and in the most cost-effective, efficient way possible.
Business owners who manage their own accounts and dedicated accountants both make use of specialised software. The Mooncard payment card system is a good example of accounting software that can help to make the accounting process easier. The Mooncard solution ensures that tracking business expenditures is accurate, simple and fast.
Every time a purchase is made using the Mooncard corporate card, an electronic expense report is automatically created and sent to the relevant department. Mooncard means you will never have to worry about lost receipts ever again! Visit the Mooncard website to arrange a completely free, no-obligation demonstration of this remarkable payment card system today.