8 Types of Accounting Explained

Accounting is a vital component of any organization's internal functions. After all, every business needs to constantly keep track of its finances to maintain its financial health. And although today we have multiple financial apps, they are mostly helpful in managing day-to-day tasks like expense tracking.

Organizations still need the expertise of a skilled accountant to manage more complex tasks like tax filing and business auditing. That's why accountants are in high demand across all industries- from government organizations to service and manufacturing firms.

Generally, accountants gather, analyze, and report financial data. But interestingly, there are different types of accounting, each designed to serve a specific purpose. So, if you want to pursue a career in accounting, it's crucial you understand the eight common types of accounting.

That includes but is not limited to:

• Financial Accounting
• Cost Accounting
• Management Accounting
• Tax Accounting
• Auditing
• Governmental Accounting
• Public Accounting
• Forensic Accounting

In addition, we'll look at some of the basic requirements for a successful career in accounting.

The Different Types of Accounting

There are several types of accounting, but the primary ones include:

Financial Accounting

Financial accountants help organizations keep track of their financial transaction records and categorize financial documents. Typically, financial accountants work with their managers and colleagues to ensure the company is profitable.

More importantly, these experts constantly check the company's financial activities and record them in a ledger. Most financial accountants will generally work with disbursements and revenues, including participating in payroll, grant management, and ledger accounting.

Above all, financial accountants have to ensure the cash flow, income statements, and balance sheets comply with the GAAP (Generally Accepted Accounting Principles). Mistakes made as you work could cost you a lot of money and get you into legal trouble.

Cost Accounting

Cost accounting solely focuses on the business' cost structure. As a cost accountant, you are responsible for documenting, analyzing, and presenting the manufacturing cost. These experts oversee all fixed and variable costs to see if they align perfectly with the output.

Additionally, cost accountants work with the company's manager to make decisions based on the financial forecast while paying close attention to the production process. How these experts will calculate the unit cost majorly depends on your type of business.

Cost accountants are solely responsible for tracking, advising, and implementing strategies for the company's finances. This method of tracking costs while working with an accountant is crucial, especially when businesses are trying to scale up their operations.

Management Accounting

Managerial accountants solely focus on collecting financial data, analysis, and compiling all that information into reports they can present to the company's management. Unlike most accountants, these accounts' statements are intended for internal use only. Meaning external regulations don't govern their work.

Generally, the purpose of these reports is to provide information to the company's leaders so they can make better data-packed financial decisions for the company. Managerial accountants are able to analyze and present financial records that can be used to make predictions on various company aspects such as risk, logistics, and operations.

Managerial accountants use their expertise to assess the company's past performance in order to make informed predictions about the company's future.

Tax Accounting

Tax accountants, as the term suggests, help businesses file their tax documents annually. Aside from that, these experts help companies plan for their future tax returns, such as avoiding tax burdens and learning more about the implications of their specific tax decisions.

In most cases, large enterprises hire a tax accountant to help navigate the company's records and help with tax decision-making. Tax accountants always stay ahead of the latest tax rules to improve their services and ensure the company they are working for is tax-compliant and follows the Internal Revenue Code.

Above all, tax accountants can help their clients reduce their taxes as much as it's legally possible. Tax accountants are probably the most in-demand accountants in the business. That's because large and small companies generally require advice from these professionals to understand their tax implications.

Auditing

As much as accounting primarily revolves around tracking and reporting, auditing is a different beast altogether. By design, auditing provides independent analysis of the company's financial activities to ensure the company's financial transactions and records follow acceptable rules and standards.

Auditing can be done on a company's tax, management, financial, forensic, and international accounting. Typically, there are two major sections of auditing in accounting, namely:

Internal Auditing

When a company conducts an internal audit, it's basically done by the accountants who work within the company. Usually, this is done by the financial, tax, or even the managerial accountant. Whoever takes up the role depends on the purpose of the internal audit.

In most cases, the financial accountant will take up the role because most enterprises will focus the internal audit on the finances. But if the company's management suspects any wrongdoing, the forensic accountant will take charge.

External Auditing

External audits are majorly conducted by third-party accountants to ensure the company complies with GAAP standards. Typically, this is done when the authorities notice that a specific company has tax incongruences or when law enforcement suspects the company.

Governmental Accounting

Governmental accountants operate with a different set of rules compared to financial accountants. In essence, they are governed by the GASB (Governmental Accounting Standards Board).

Their rules are geared towards tracking and reporting standards for almost all levels of the government. That said, governmental accountants facilitate the accounting needs of most government agencies at the central or even state level.

More importantly, government auditors use these accounting reports to understand the audit of specific government institutions for signs of corruption or any irregularities in the books. Additionally, these experts advise the government on fund allocations for new projects or capital restructuring.

Public Accounting

Public accounting is more or less a business that essentially provides accounting advice to their clients based on their specific needs—from auditing and filing tax returns to installing software that will help with their accounting; you name it!

Public accountants are capable of giving accounting advice to almost all types of businesses. They are considered a more versatile accounting career path.

Forensic Accounting

Forensic accountants are the experts you call in case there are any malpractices in the company's finances. These experts will do a thorough investigation of your company's financial records, whether it's a huge corporation or a small business.

In fact, they can recreate financial information in case there are any missing documents and review if everything is by the book. 

What is Accounting?

Accounting is the process of gathering various financial records, analyzing and arranging them, and then creating a systematic report to be used as financial data. Organizations use this data mostly to gain insights into the company's financial health.

In other cases, they use this data to give reports to external parties like tax collectors and investors. But since there are different accounting techniques, the accountant can either use:

• Cash-Basis accounting
• Accrual Accounting or
• Hybrid Cash-Basis Accounting

Each method has its own pros and cons and will significantly impact your tax report. So, keep that in mind when choosing an accounting method for your business.

Would you Like to Work as an Accountant?

If accounting sounds like the field for you, we'll cover some of the major steps you should take to prepare you for job search and career advancement. 

What Qualifications Do You Need to be an Accountant?

• Get a bachelor's degree in accounting or any other related field. You can consider pursuing a Master's Degree in Finance from EAE Business School Madrid for advanced specialization.
• Become a Certified Public Accountant (CPA). That means you should pass the CPA exam and meet the specific state requirements to work in the United States. You can also check with the Board of Accountancy for the specific requirements in your jurisdiction.
• Improve your analytical, mathematical, and organizational skills. But remember, there's more to the role than just numbers skill. Pay close attention to details, be organized, and be ethical. Confidentiality is a must when you have access to financial information.
• Gain practical experience through internships and entry-level positions. That will not only look good on your resume but will also be valuable in launching your accounting career.

The Big Four Accounting Firms

The Big Four are the four largest accounting and auditing firms globally. They bring in billions of dollars in revenue annually as they handle the majority of audits for Corporations in the United States with publicly traded stocks.

These four major accounting firms include:

1. Deloitte
2. PricewaterhouseCoopers (PwC)
3. Ernst & Young (EY)
4. Klynveld Peat Marwick Goerdeler (KPMG)

Working in any of these four firms is one of the most coveted things by accountants. So, if you also want to pursue your accounting career in any of the Big 4 firms, it's vital you find out more about each to decide which one suits your interests better.

• Deloitte: Deloitte provides services in audit and assurance, consulting, tax, and advisory in over 150 countries and serves clients in various industries. The firm mainly targets MBA graduates, undergraduates, and interns. Therefore, it's one of the best places to launch your career.
• PricewaterhouseCoopers (PwC): PwC is an industry leader in the advisory market. The firm has a global presence and operates in over 155 countries. The best thing about PwC is that it offers students an opportunity to prepare for their careers through part-time internships.
• Ernst & Young (EY): EY is a strategy-based firm offering its clients strategy-based consulting services. That includes IT risk and assurance, cross-advisory teams, performance improvement, and risk management. The firm mainly targets undergraduates and master's graduates with less than three years of experience in the field.
• KPMG: Although KPMG is the smallest of the Big 4 firms, it operates in over 146 countries worldwide. It mainly offers tax, audit, and advisory services in business performance, protection, digital transformation, and governance. It's one of the best places to launch your career if you want to understand Fortune 500 business operations better.

Final Thoughts

If you enjoy working with math and finances, then there's no doubt a career in accounting is the best choice for you. And especially now that accountants are in high demand, this is quickly becoming a lucrative career.

But as we've mentioned in this article, you must create a solid foundation to set yourself apart in this industry and land outstanding jobs. That means acquiring both the soft and hard skills that make a competent accountant.

You can even take it a notch higher and enroll in a Master's in Finance program at EAE Business School Madrid. That will add some more spice to your resume and make you marketable.