Types of accounting
The definition of accounting can be explained, but on closer inspection, the different types of accounting take more research to properly understand.
- What is accounting?
- The most common types of accounting
- How to become an accountant?
- What an accountant can do for you
1. What is accounting?
The common misconception regarding accountancy as a profession is the employee sitting at their desk all day with the sole purpose of crunching numbers and making sure that the books are kept tidy. While keeping the books tidy is a definite function of an accountant, the assumption that this is the entirety of the job could not be more wrong. With the constantly changing landscape of the business world, the function of an accountant has greatly evolved from the basic role we all have in our minds. Even though the basic tasks remain, the best way to understand the diversity and importance of the profession is to look further into the different types of accounting and what they provide to a business.
2. The most common types of accounting
While there are the more commonly known tasks within the accounting profession, as mentioned above, there are certain roles and tasks which may not immediately spring to mind as the responsibility of an accountant. Below we highlight some of the different types of accounting, and although there are many intricacies and other areas, the responsibilities listed here will help to give you a broader understanding of the responsibilities an accountant maintains.
- Tax accounting - Tax accounting as a general term is probably one of the better known types of accounting as everyone and every business has to pay taxes! Tax accounting is a subsector of accounting that deals with the preparation and calculation of tax returns and the payment of taxes. Tax accounting is used by businesses, individuals, charities and even those who may be exempt from tax. Accountants in this field have to keep up to date with any changes in laws and regulations that may affect the calculation of payments under their control. While all types of accounting are of huge importance, any mistake or miscalculation in tax accounting can result in fines for a company or individual.
- Financial accounting - Financial accounting is probably the closest of all the types of accounting to the stereotype of accounting for anyone outside of the profession. The main function of financial accounting is to track, record and report on the financial performance of a business through the generation of financial statements. Financial accounting looks at the past performance of a business in order to provide an accurate understanding of the financial performance of the business during a specific timeframe. These reviews are provided through the use of financial statements which can be provided to external stakeholders such as financial institutions or investors.
There are two types of financial accounting, cash and accrual accounting. The difference between the two relies on the timing of when sales and purchases are recorded by your business. Cash accounting is the recording of transactions as and when money changes hands. Accrual accounting records the time when any revenue is made or expenses incurred, such as invoices received but are yet to be paid.
- Management accounting - Management accounting is the function of accounting that, when fully understood, will break the stereotype of an accountant in today's business world. As opposed to financial accounting looking into the past, management accounting looks forward and assesses information in order to make key internal business decisions such as implementing measures to increase efficiency or cutting unnecessary costs.
The function of management accounting is used in all facets of business, and while there are many forms of accounting and analysis included, the most common types of management accounting are strategic management, performance management and risk analysis. Depending on the size, stage or industry of a business, all or multiple types can and will be used. Put simply, decisions made through the process of management accounting will influence all departments of a business and provide a clear path for the business to take.
- Accounting information systems - The newest and quickest developing type of accounting is due to the development in technology allowing for the creation and increased use of accounting software available to both accountants and business owners. Like most updates in technology, the primary function of accounting software is to increase the efficiency of the user by streamlining the functions it has been created to improve. The development of these software and the huge choice available, go some way in proving how critical the functions and accuracy of accounting are to any business. For a deeper understanding of the functions and choice of such software, have a look at our article on Accounting Software.
- Auditing - The process of auditing is the reviewing and verification of all financial statements and documents of a company. Most companies will or should do an internal audit every year simply for the accuracy of their own financial statements. These audits are generally provided by employees of the company but an external audit needs a qualified expert with no ties to the company to come in and provide a more candid approach than an employee. An external audit can be government ordered and is usually instigated if a business reaches certain standards such as exceeding a set revenue amount or has a particular number of employees. The calling of an audit can be met with negative connotations, but it can also be the necessity to ensure a business of a certain level is being run properly and in line with the laws set out by the country it is operating in.
3. How to become an accountant?
One important reason for understanding the many different types of accounting is if you are planning a career in the profession. It is common for anyone to aspire for a certain profession or role, but in the case of accounting, the common misconceptions of the profession may deter people who could be perfect for the role from actually beginning in the first place. With the many types of accounting, there are also many different types of associations to attain qualifications and different qualifications that will suit various roles in the profession. Whilst a third level education is an advantage when applying, it is not required. Some of the larger associations to look into are the ACCA, CIMA, AAT, and CAI. The qualifications provided by these associations cover every type of accounting and will lead to a career as a certified accountant which enables you to work in any role in the profession or even start your own accounting firm.
4. What an accountant can do for you
With all the types of accounting listed and explained already, the impact an accountant can have is probably becoming clearer! As a business owner, the impact an accountant could potentially have on your business is huge. While you may think that the expertise is all that can be added, it is the impact on other areas of your business that may not be so obvious. Many business owners, especially in the early stages of the business, take on a DIY approach to accounting as it acts as a major cost-saving measure. Without entering into the gains made from having an expert on the job, the time spent on these general tasks are taking you, the business owner, away from other duties that your business needs. Instead of thinking about the cost of hiring or taking on an outsourced accountant, consider where your time is better spent in your business. Spend more time focusing on your customers in order for your business to prosper and grow.
As an individual, the types of accounting required obviously reduce in necessity but can also have a major impact on your life. Even looking at the simple task of assessing your yearly tax payments can be very beneficial. Many accounting firms specialise in this area and usually work on a commission basis, meaning it will be of no cost to the individual unless the work of the accountant provides a refund or rebate.
Although looking at the different types of accounting is necessary when choosing accounting as your career, understanding what type of accounting suits what type of business is crucial for any business owner when it comes to making a decision for their business. By understanding the benefits of each function, a business owner can therefore analyse which type of accounting, if any at all, to implement into their business.
As with any decision that will have an impact on your business, it is usually better left to the experts in the case of accounting. Making sure to choose the right one can be a difficult task, but finding your match can be simple by using Welink Accountants. At Welink Accountants, you can easily search by inputting what expertise you need and the industry your business is in. A list of perfect matches will then be made available to you. When looking at the detailed profiles, you can see which firms provide a free consultation that will allow you to communicate the services you require and allow the firm to show you exactly how they can assist you. This matchmaking service is provided for free with no obligation, the only charges that may apply are between you and the accountant of your choice.