What are the 8 branches of accounting?
Accounting is a very broad and dynamic field that is constantly adapting to the specific needs of its users. Over the last few decades, we have seen the emergence of new types and specialisations. If you plan to study accounting, then you should be aware of its main variants.
To help you get a better start in this exciting career, in the following article we offer you a list of the main types of accounting. Are you ready?
What are the 8 branches of accounting?
The 8 branches of accounting are:
- Financial accounting
- Management accounting
- Tax accounting
- Forensic accounting
- Project accounting
- Social accounting
- Auditing
Accounting consists of recording all economic operations in order to be able to know where everything the company has come from, where it has gone and how much is left.
Thus, through accounting, each and every one of the economic operations carried out by an entity is recorded, in order to be able to obtain all this information in an orderly and grouped manner.
In essence, it is the part of finance that studies the different items that reflect the economic and financial movements of a company or entity”.
Therefore, as can be seen from the definition, in one way or another, all those who “handle” funds can keep their accounts: an individual, a group, a community of owners, an association, etc.
It is important to note that, of the types of accounting that exist, companies are obliged to keep double-entry bookkeeping, also known as double-entry bookkeeping.
This is based on the assumption that there is no debtor without a creditor; therefore, each accounting entry involves at least two accounting accounts: one debit and one credit (profit and loss). And the sum of the items recorded on one side must coincide with the total sum on the other side.
1. Financial accounting
Financial accounting is one of the most widespread variants and has direct contact with many sectors. Broadly speaking, it is the process of collecting, classifying, recording, and reporting transactions in monetary terms, for external use, usually in the form of the famous financial statements.
As you may know, financial statements reflect the past performance and current position of an entity based on a set of standards and guidelines known as generally accepted accounting principles (GAAP).
The latter is an important part, as they constitute a common framework for financial accounting, which is used in any jurisdiction. This includes standards such as International Financial Reporting Standards (IFRS) and other rules that accountants must follow in order to prepare financial statements in a transparent manner.
2. Management accounting
This comprises the development and interpretation of accounting information (timely and reliable) for decision making, usually for internal use by the management of each company. In general, the data provided are much more detailed than those prepared for external use.
This allows for more effective organisation and control, as well as meeting the company’s strategic objectives. Information can be provided in the form of budgets and cash flows, which enables the company to effectively plan its future activities.
It can also include evaluations based on the economic performance of the different activities carried out by the company and past results. The form and content of any report produced in the process are at the discretion of management.
An important branch of this type of cost and expense accounting involves the application of different techniques in order to monitor and control costs and expenses. Its application is often best suited to the needs of product manufacturing.
3. Public accounting
Also known as budgetary accounting, this refers to the information system used in the public sector. It is a variant of the financial accounting system used in the private sector.
The need to use a separate system of accounting types for this sector arises because of the considerable difference between the objectives of state and private institutions. Public accounting ensures that the financial position and performance of institutions in this sector are set within a budgetary context.
Don’t forget that financial constraints are a major concern for many governments. Many jurisdictions have a separate set of rules for transactions and events in public entities.
4. Tax accounting
As the name implies, tax accounting focuses exclusively on the control and supervision of a company’s tax obligations. It is always governed by the rules laid down in national laws. As a rule, these guidelines are different from the rules governing the preparation of financial statements such as GAAP or IFRS.
It, therefore, refines the financial statements prepared under financial accounting principles in order to comply with the relevant tax legislation. In this way, the company’s tax liabilities are determined.
5. Forensic accounting
This is one of its most interesting variants. Here use is made of accounting, auditing and investigative techniques, legal-procedural knowledge and skills in finance and business, in cases of disputes or litigation.
In addition, forensic accountants are of great help in resolving cases of financial information fraud and money laundering. They also make use of international standards in order to establish intelligence units, and supervisory bodies and prevent illicit activities.
6. Project accounting
This term is a powerful functionality for your company, it allows you to integrate processes and refers to a system that tracks the financial progress of a project through frequent reporting. From a general point of view, this is a fundamental component of management accounting.
We can see it as a specialised branch that has as its priority to ensure the financial success of company projects such as, for example, the launch of a new product. It is important to note that this can be a source of competitive advantage for project-oriented organisations such as construction companies.
7. Social accounting
This is the process of reporting the effects of a company’s activities on its social and ecological environment. It arises mainly through the procedures and calculation measures, and environmental reports that accompany companies’ annual reports. It is important to note that it is still in its early stages.
8. Auditing
Finally, we will highlight auditing, an area -generally carried out by external accountants- that verifies the current situation of a company in accordance with current and legal regulations. It is also responsible for validating that the information presented in the balance sheets is true.
Audits can be carried out on an annual, half-yearly or quarterly basis: it all depends on the needs of each company.
What makes accounting important?
As we have said, accounting consists of recording all the economic movements of a company in order to draw up its financial statements.
We could say, then, that it pursues two objectives:
- To provide a true and fair view of the state of the business to people interested in it, both internally and externally, such as shareholders, creditor banks, the tax authorities, investors, etc.
- To serve as a basis for calculating the corresponding taxes. In other words, anyone can claim that their company is doing very well, but only the financial statements will tell whether this is true or not.
Accounting information is therefore fundamental for the company. It makes it possible:
- Know how much we have, how much we earn, how we earn it, what we spend it on, etc.
- Better manage cash, inventories, accounts, expenses, liabilities…
- Understand the past, the present and foresee the future of the company.
- Have absolute knowledge and control over the business.
- Improve decision making and stay one step ahead.
All this is in accounting. Therefore, we can say without any doubt that it is the best tool for the successful management of a business.
Conclusion
That’s it! You now know the 8 branches of accounting that are indispensable for businesses of all sizes.
Indeed, no company is exempt from needing accountants, as their financial health depends on them: having these experts ensures that an organisation has the necessary information for the effective management of its economic resources.
Remember that these are just some of the main branches of accounting; if you decide to study a career related to this discipline, you will be able to learn other areas in which you will also be able to work.
Thanks to the technological progress the world has experienced since the end of the 20th century, it is obligatory to make special mention of information technology. Modern resources have turned the conventional approach to accounting upside down. Thus, the task of accounting experts has been made easier thanks to spreadsheets and stock or asset registers, with better control of inputs and outputs.
Numerous accounting programmes or software exist to help companies in their daily accounting tasks. These programmes facilitate invoicing, and customer management, automatically performs balance sheets and even control the hours of the organization’s employees.
