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The 12 Branches of Accounting: Their Uses and How They Work

July 22, 2024

There are twelve types of financial accounting. Each branch has come about thanks to technological, economic or industrial developments. And each has its own specialized use.

Accountants tend to specialize in one branch.

Some of these branches of accounting are important to small businesses. Their usefulness will be noted below, as applicable.

In this article, we’ll cover:

Financial Accounting
Cost Accounting
Auditing
Managerial Accounting
Accounting Information Systems
Tax Accounting
Forensic Accounting
Fiduciary Accounting
Government Accounting
International Accounting
Fund Accounting
Political Campaign Accounting

1. Financial Accounting

Financial accounting involves recording and categorizing transactions for businesses. This data is generally historical, meaning it’s from the past.

It also involves generating financial statements based on these transactions. All financial statements, such as a balance sheet and an income statement, must be prepared in a certain way. This tends to be according to the generally accepted accounting principles. These are known as GAAP for short.

Public companies have to follow a set of rules set out by the government (this is the Securities and Exchange Commission in the U.S.).

Financial accounting is performed to conform to external regulations. It is not for internal employees to analyze and make financial decisions— managerial accounting is used for this purpose.

2. Cost Accounting

Cost accounting is considered a type of managerial accounting.

Cost accounting is most commonly used in the manufacturing industry, an industry that has a lot of resources and costs to manage. It is a type of accounting used internally to assess a company’s operations.

Cost accounting concerns itself with recording and analyzing manufacturing costs. It looks at a company’s fixed (unchanging and constant costs, like rent) and variable costs (changing costs, like shipping charges). Then it looks at how they affect a business, and how these costs can be better managed, according to Accounting Tools.

3. Auditing

There are two types of auditing: external and internal auditing. In external auditing, an independent third party reviews a company’s financial statements. This is to make sure they are presented correctly and comply with GAAP.

Internal auditing involves evaluating how a business divides up accounting duties. As well as who is authorized to do what accounting task and what procedures and policies are in place.

Internal auditing helps a business zero in on fraud, mismanagement and waste. It also identifies and controls any potential weaknesses in its policies or procedures.

4. Managerial Accounting

Also known as management accounting, this type of accounting provides data about a company’s operations to managers.

The focus of managerial accounting is to provide data. This is what managers need to make decisions about a business’s operations, not comply strictly with GAAP.

Managerial accounting includes budgeting and forecasting and cost analysis. As well as financial analysis, reviewing past business decisions and more.

Cost accounting is a type of managerial accounting.

FreshBooks has simple online accounting software for small businesses. This makes it easy to produce these reports.

5. Accounting Information Systems

AIS concerns itself with everything to do with accounting systems and processes. This involves their construction, installment, application, and observation. This can include accounting software management. As well as the management of bookkeeping and accounting employees.

6. Tax Accounting

Tax accounting involves planning for tax time and the preparation of tax returns. This branch of accounting aids businesses to be compliant with regulations set up by the IRS.

Tax accounting also helps businesses figure out their income tax and other taxes and how to legally reduce their amount of tax owing. Tax accounting also analyzes tax-related business decisions and any other issues related to taxes.

7. Forensic Accounting

This specialized accounting service is trending in accounting and is becoming increasingly popular. Forensic accounting focuses on legal affairs. Such as inquiry into fraud, legal cases and dispute and claims resolution.

Forensic accountants need to reconstruct financial data when the records aren’t complete. This could be to decode fraudulent data or convert a cash accounting system to accrual accounting. Forensic accountants are usually consultants who work on a project basis.

8. Fiduciary Accounting

This branch of accounting centers around the management of property for another person or business. The fiduciary accountant manages any account and activities. This is specifically related to the administration and guardianship of property.

Fiduciary accounting covers estate accounting, trust accounting, and receivership. This is the appointing of a custodian of a business’s assets during events such as bankruptcy.

9. Government Accounting

Government accounting, also known as public accounting, handles any state and federal fund allocation and disbursement. This can range anywhere from social accounting and the measure of cost to humans, to climate change or the use of welfare funds.

Government accounting tracks the movement of money through a number of different agencies and makes sure that budgets are kept to or met.

A government accountant may work in state or federal programs such as housing, education or healthcare.

10. International Accounting

The need for international accounting expands alongside growth within international markets. This branch of accounting then serves to learn about the laws and regulations in other countries. So that there is a fair and honest cross of information.

International accountants follow GAAP. But they are also well versed in International Financial Reporting Standards (IFRS).

11. Fund Accounting

A fund accountant will work with non-profit organizations. They will make sure that any funds that are taken in are handled correctly and accurately. They will work according to company policy, or in accordance with the laws that govern NPOs.

Fund accounting tends to be used by:

Charities
Churches
Educational institutions
Hospitals
Government agencies
Clubs

12. Political Campaign Accounting

The political campaign branch of accounting oversees the development and implementation of the finance systems. This is within a political campaign.

This could include transaction accounting or monitoring donations. With the aim of ensuring compliance with state and federal laws. It is practiced in local, state, or nationwide political races.

People also ask:

What Are the Three Types of Accounting?
What Are the Two Types of Accounting?

What Are the 3 Types of Accounting?

Though there are 12 branches of accounting in total, there are 3 main types of accounting. These types are tax accounting, financial accounting, and management accounting.

Management accounting is useful to all types of businesses and tax accounting is required by the IRS. Financial accounting is only relevant to larger companies.

Tax Accounting

In this type of accounting, all records and reports are made according to regulations established by the tax authorities.

Small businesses can hire a specialized tax accountant. They are charged with making sure the accounting records are IRS-compliant. As well as who transfers that information to the business tax return.

The IRS requires that businesses use one accounting system and stick to it (see below for an exception). Whether they use the cash or accrual method determines when they report revenue and expenses.

Financial Accounting

Financial accounting is performed with potential lenders and investors in mind, as well as GAAP.

Using this standard accounting method helps investors and lenders get an accurate read on a business’s financial health. This is if a company is looking to finance a new purchase or venture.

It also helps businesses be transparent by reporting management’s income.

That said, small businesses usually aren’t required to use GAAP and its accrual method. Any business that makes, buys, or sells products must use GAAP, according to the IRS.

Larger businesses often employ accountants in-house. This is to help them comply with these standard accounting principles.

Management Accounting

This category of accounting doesn’t follow GAAP. But it does follow standard accounting practices taught in accounting school.

The focus here is on generating financial statements like budgets, and product costings. As well as cash flow projections, and business acquisition analysis reports.

Standard reports like balance sheets, profit and loss statements, and cash flow statements are key. They are generated in a way to help managers analyze past decisions and plan for the future.

Small businesses may only use cash projections. Larger companies, especially manufacturers, will use many more reports.

Also Read: Best Software for Account Management

What Are the 2 Accounting Methods?

There are 2 accounting methods: Cash and accrual. Most small businesses can use either method. Businesses that are corporations or have gross revenue over $5 million per year are required to use the accrual method, according to the IRS.

Cash Method

The cash accounting method is the simplest method. When money comes in, revenue is recorded. When money goes out, an expense is recorded, according to the Houston Chronicle.

Accrual Method

In accrual accounting, revenue is recorded when it’s earned, not when money actually comes in. A company can perform a service and bill the client. Even if the client hasn’t paid yet, revenue is still recorded in the books.

In accrual accounting, the matching principles ensures that expenses are matched to revenue in accrual accounting, meaning they’re recorded at the same time as revenue. So if a house painter has to buy paint for a job, the total income for the job and the cost of the paint are recorded in the books at the same time. It doesn’t matter exactly when the paint was purchased.