Different Branches of Accounting: What Are They and How They Work

With the advancement in technology and industry expertise, the way business was done and operated changed. Additionally, its internal logistics started transforming as well. Accounting was one such logistic, that has come to evolve and transform with time. This led to the inception and gradual differentiation in the different branches of accounting. 

The differentiation also came to come around due to the different needs that people had with their accounting systems. This made them device branches of accounting that catered to their specific institutionalized needs.

Accounting is divided into 8 different branches. Namely, 

1. Financial Accounting
2. Cost Accounting
3. Managerial Accounting
4. Auditing
5. Tax Accounting
6. Fund Accounting
7. Accounting Information Systems
8. Fiduciary Accounting

In this blog, we will not only highlight what these different branches mean but also how they uniquely operate and differ from one another.

• Financial Accounting

When an organization uses structured accounting principles to record the transactions that occur in the business, then that is called financial accounting. It can be said to be the original form of accounting as a field. The purpose solved by financial accounting is that of calculating the profits and losses incurred by an organization for a particular period, and the state of their financial health and standing in a given phase. 

This branch of accounting is mainly of application to creditors, banking sector, and financial institutions, etc, to assess the financial status of any organization.

• Cost Accounting

When an accountant assesses the cost of a product or a service, then that process is called cost accounting. The calculation is done keeping in mind all the factors that contribute in the production of that service/product. These include production cost, manufacturing costs, administrative costs, and additional overhead charges. 

The main purpose of cost accounting is to manage and efficiently work on bringing the cost of the product at a point to maximize profits, and then to also determine any potential wastage, etc.

• Management Accounting

The main purpose of this branch of accounting is to help business administrators get a more holistic understanding of the business. This helps in enhancing the decision making and additional controlling in the various activities of the business. It includes various particulars such as: budgets, expected cash flow, fund flow statements, cost-volume-profit analysis report, break even point calculation, etc.

A point to be noted here, is that management accounting and financial accounting are different from each other. Where the former aids the management of an organization in better decision making, the latter is of use to shareholders, financial institutions, etc to assess the position of the company.  Also, management account information is of a confidential nature, and is thus of use and is shared only with the management of an organization.

• Auditing

When an external certified public accountant assesses the records and accounts of a business for its legitimacy and accuracy, then that process is called auditing. Although, there are cases of internal auditing as well, where an employee or a team of employees assess the companies accounts for accuracy and consistency from time to time on a regular basis.

• Tax Accounting

Accounting, that is of special importance and use in matters related to taxation is known as tax accounting. The purpose it solves includes the preparation and filing of taxes, and dealing with their additional legal implications as well. The aim of every tax accountant is to maximize tax benefits, minimize tax payments and the preparation of financial records in order to get ready for tax filing. This also includes consultancy on different financial matters of the business, as minimizing the tax amount and maximizing savings as well as benefits is possible only when meticulous and strategic steps are taken right from the beginning.

• Fund Accounting

This type of accounting is used to keep a tab of the funds that are incoming in a non-profit organization. This is done in order to make sure that the funds that thus come in are utilized in a proper way.

• Accounting Information System

Accounting Information System (AIS) is the branch that takes care of everything that is to do with accounting systems. Ranging from: construction of accounting systems, installment, application and observation. This also includes the management of the accounting software and the further management of employees that are a part of the bookkeeping and accounting team. 

• Fiduciary Accounting

When a branch of accounting is around the dealing and management of the property as a representative of an individual or a business, then it is known as fiduciary accounting. This is done with the purpose of managing and administering guardianship of property.

Wrapping Up:

There are multiple branches of accounting services and practices, but there are three main branches that form the spine of the field. These are

• Financial Accounting
• Tax Accounting, and
• Management Accounting

It is these three that are common and useful in companies that are operating in all sizes and stages of business. Add to that, there are two types of accounting methods, the first is the cash method and the second is the accrual method. Where the former is the simplest one and is used while recording when money comes in and when money goes out; the latter is used for revenue when it is ‘earned’.

Complete knowledge of the different branches of accounting can aid a business, in zeroing down what specific type of accounting expertise is required by their organization, as well as how to efficiently take care of those tasks. We hope that with the help of this blog, you will be able to make accurate distinctions between the different branches of accounting and how their variations are of integral use to your business.