8 Types of Accounting and Their Functions
Financial challenges are part of running a business. It’s important that business owners are familiar with the different types of accounting so that they are able to find the right type of help to combat those challenges, whatever they may be.
Choosing the right type of accountant
Think about medical assistance. If you’re having issues with your knee, you wouldn’t go to an ear, nose and throat specialist to examine you, you’d want to see a knee specialist. The same idea pertains to accounting. Business owners need to identify the challenge areas their businesses face and hire an accountant that specializes in those areas.
One company may utilize a mix of accounting professionals to address different areas of the business. Maybe they hire an in-house bookkeeper to manage all their record-keeping, and then out-source a tax accountant for a number of months to prepare the business’ income tax at year-end.
Choosing the right type of accountant requires owners and company decision-makers to take an honest look at what needs to get done to prevent the business from enduring financial discrepancies, fraud, or tax penalties. By identifying what problems the company could face, it allows owners to make an informed decision in hiring an accounting professional who’s an expert in dealing with that type of problem.
Different types of accounting
Accounting types differ according to purpose or functionalities. Below are the most in-demand areas of accounting that businesses may need to take advantage of now or in the future.
1. Financial accounting
Among all the fields of accounting, financial accounting is probably the most fundamental. Financial accountants are deeply involved in the process of managing, tracking, and compiling financial reports through the generation of items like profit and loss or income statements, balance sheets, and cash flow statements.
All accountants are practicing financial accounting, working with company leaders and bookkeepers to analyze the business’ financial standing and the previous transactions that led it to where it is now. They also abide by the U.S.’ Generally Accepted Accounting Principles to convey the company’s profitability transparently and accurately.
Financial accounting always refers back to the past performance of the organization over a specified period. The reports generated out of these performances are shared with external stakeholders like investors and banks.
2. Forensic accounting
This is one of the most critical accounting fields. Forensic accounting experts detect and analyze money trails to investigate fraud or embezzlement, in most cases as part of legal investigations.
Are there really that many instances of fraud, though? Yes, there are. The association of Certified Fraud Examiners (ACFE) conducted a 2020 Global Study on Occupational Fraud and Abuse, which collected data from 125 countries. The study concluded that in 2020 alone, there was over $3.6 billion of losses resulting from fraud.
Tracing fraud – how it’s committed and where the money has gone – requires a tremendous amount of analytical skills. The job itself takes a lot of intuition, determination, and a knack for seeing minute accounting details.
The following are some of the crimes that forensic accountants solve:
- Fraudulent insurance claims
- Bankruptcy fraud
- Telemarketing swindles
- Asset misappropriation
Larger organizations seek the expertise of forensic accountants to investigate suspicious financial activities. This accounting specialty is often used by banking and financial institutions, police departments, attorneys, and huge corporations to identify fraudulent transactions and make the right course of action to prevent them from happening again.
There are instances where the forensic accountants are called to testify in court to explain their findings or reconstruct the business’ financial information to shed light on credit, debit, and other cash disputes.
3. Entertainment accounting
Entertainment accountants provide financial services to Hollywood studios, production companies and artists working in the multi-billion dollar industry.
The role of this accountants will vary based on who they work for. Those working at studios or production companies may focus on production accounting, which requires the preparation of statements that show the company’s income and expenditure for a given project. They may also have to arrange audits, maintain contracts and ensure the company is meeting its tax requirements.
If you work exclusively for talent – an actor, writer, director, etc. – you’re likely in charge of managing their finances. This includes contract negotiations, profit and royalty discussions, and retirement planning.
4. Tax accounting
Tax accounting is one of the main branches of accounting that focuses on preparing, managing, and complying with taxes all year round. Tax accountants make sure that the company is up-to-date on the frequently changing tax laws and future tax return plans.
While it’s true that accountants are expected to handle taxes for any organization or individual they work for, having a tax accountant who’s an expert in the field allows businesses to utilize money-saving strategies and churn out tax returns. Tax accountants will analyze the different ways that their clients can legally receive bigger refunds and keep more of their hard-earned income.
It’s illegal for companies to evade taxes, but they definitely can avoid it. Tax accountants find legal ways for companies to pay the minimum amount of taxes they owe by reducing their taxable income.
5. Environmental accounting
As companies run their operations, they inevitably make an impact to the environment. Environmental accountants are tasked with weighing the consequences of the damage a business’ operations cause against the company’s profit and reputation. The challenge for these experts is finding ways to mitigate the environmental hazards of running the business without negatively impacting its profitability.
Environmental accountants are responsible for ensuring government and tax compliance and proper budget allocation for penalties. They also work with product teams to find alternative solutions to harmful materials used in manufacturing goods. They set the budget for environment-friendly materials and encourage the use of the organization’s existing resources.
6. Nonprofit accounting
Not-for-profit organizations require special accounting skills to effectively manage incoming funds from donors and comply with tax requirements. While for-profit companies aim to profit for their shareholders’ benefit, nonprofit organizations aim to use accumulated funds from donations to impact their target beneficiaries positively.
This accounting sector reports all activities geared towards the common good, which is why nonprofit accountants create a systematized overview of how donations and investments were used and which individuals or organizations give the most grants.
Learn more about accounting for nonprofits here.
7. Management accounting
All companies require management accounting when making impactful decisions for future projects and business expansion. This is usually done for reporting to shareholders, investors, and banking institutions to show the business’ current performance.
Compared with financial accounting, management accounting is always forward-looking. The financial transactions in the past are used to devise ways to operate efficiently and maximize profits in the future. Experts in this field provide forecasts for the owners, and offer strategic solutions that will ramp up business performance and prevent potential risks.
8. Government accounting
Government accounting tracks and reports all government-related financial transactions. Government accounting is governed by the GAAP rules to make sure that the national budget is intended for specific purposes and that all expenditures are accounted for.
This method shows how each government initiative performs and how much public money is spent to implement the project.
Types of government funds used by accountants:
- General fund – this serves as the catch-all fund for different government resources that haven’t been allocated for specific purposes yet.
- Permanent fund – a restricted endowment fund that disburses money for its intended beneficiaries.
- Special revenue fund – most commonly used for funding public utilities such as libraries, museums, and public schools.
- Capital projects fund – this fund is intended for major capital facilities or construction projects including long-lived establishments such as government buildings and public hospitals.
- Debt services fund – a type of fund used to repay long-term debts from specific government projects.
The primary purpose of government accounting is not to generate income but to spend responsibly for its constituents’ benefit. Government accountants track all these accounts and make sure that every cent used in specific projects is recorded. They also keep accurate records of remaining funds to ensure stakeholders that no public money is misused and misappropriated.
All types of accounting have different specializations, but they have one thing in common
All kinds of businesses and organizations need accounting to go beyond complying with taxes. Whether they’re aiming for profitability or philanthropy, companies should get accountants who specialize in specific areas and follow general accounting principles.