When asked what accountants do, responses often mention roles such as tax agents and independent auditors. The functions performed by the vast number of professional accountants who work in businesses are often forgotten and not well understood.
What do the independent director, the internal auditor and the chief financial officer of companies all have in common? The individuals in these positions could all be professional accountants working in businesses. Besides these roles, professional accountants take on a vast array of other roles in businesses of all sorts, including in the public sector, not-for-profit sector, regulatory or professional bodies, and academia. Their wide-ranging work and experience find commonality in one aspect – their knowledge of accounting.
As a result of economic, industrial, and technological developments, different specialised fields in accounting have emerged.
Different branches of accounting came into existence, keeping in view various types of accounting information needed by a different class of people.
Each branch has come about thanks to technological, economic or industrial developments and has its own specialised use.
Financial accounting is a systematic method of recording transactions of any business according to the accounting principles. It is the original form of the accounting process. The primary purpose of financial accounting is to calculate the profit or loss of a business during a period and provide an accurate picture of the business’s financial position as on a particular date. The Trial Balances, Profit & Loss Accounts, and Balance Sheets of a company are based on the application of financial accounting principles. These are useful for creditors, banks, and financial institutions to assess the company’s financial status.
Financial accounting involves recording and categorising transactions for a business. 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 a balance sheet and income statement, must be prepared according to the generally accepted accounting principles (GAAP), according to Accountingverse.
Further, taxation authorities can calculate the tax based on these records only. These are just the primary help, and you can get from this accounting. Besides these, there are a lot of other things, like knowing about bank balances, account receivable balances, account wise summary, bank reconciliation, etc. The list is endless.
Financial accounting is performed to conform to external regulations and is not for internal employees to analyse and make financial decisions—managerial accounting is used for this purpose.
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 deals with evaluating the cost of a product or service offered. It calculates the cost by considering all factors, including manufacturing and administrative, that contribute to the output production. The objective of cost accounting is to help the management fix the prices and control the cost of production. It also pinpoints any wastages, leakages, and defects during manufacturing and marketing processes. Possibly, these short descriptions about these accounting branches may give an overlapping understanding of each branch of accounting.
Cost accounting concerns itself with recording and analysing manufacturing costs. It looks at a company’s fixed (unchanging and constant costs, like rent) and variable costs (changing costs, like shipping charges) and how they affect a business and how these costs can be better managed, according to Accounting Tools.
There are two types of auditing: external and internal auditing. In external auditing, an independent third party reviews a company’s financial statements to make sure they are presented correctly and comply with GAAP.
Internal auditing involves evaluating how a business divides up accounting duties, who is authorised 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 or identify and control any potential weaknesses in its policies or procedures, according to Accounting Tools.
Auditing is a branch of accounting where an external certified public accountant known as an Auditor inspects and certifies the accounts of the business for their accuracy and consistency. Sometimes internal auditing is also practised where an employee of the same company or external personnel audits the accounts regularly and aids the management keep accurate records for audit purposes.
In most countries, the auditor who certifies the accounts is the statutory auditors of the company. These auditors have to be at the arm’s length distance with the company. This means they should not be in a position to get a direct benefit from the company. On the other hand, the company should not be anyway related to these auditors. So that they can independently inspect and report about the status of their accounts. In listed companies, shareholders appoint these auditors. At the same time, internal auditors are appointed by the management of the company. These statutory auditors are responsible for reporting the right state of affairs to the shareholders of the company.
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 that managers need to make decisions about a business’s operations, not comply strictly with GAAP.
Managerial accounting includes budgeting and forecasting, cost analysis, financial analysis, reviewing past business decisions and more. Cost accounting is a type of managerial accounting.
This branch of accounting provides information to management for better administration of the business. It helps in making important decisions and controlling of various activities of the business. The management can make decisions efficiently with the help of various Management Information Systems such as Budgets, Projected Cash Flow and Fund Flow Statements, Variance Analysis reports, Cost-Volume-Profit Analysis reports, Break-Even-Point calculation, etc.
Management accounting and financial accounting are not to be confused with each other. Both are different. Management accounting serves the management’s needs in decision-making regarding minimising the cost factor and enhancing profit-making. On the other hand, financial accounting serves the needs of shareholders, creditors, and financial institutions to ascertain the company’s financial position. Management accounting records are kept secret for the use of management only. As a result, they are not made public.
FreshBooks has simple online accounting software for small businesses that makes it easy to produce these reports.
Known as AIS for short, accounting information systems concerns itself with everything to do with accounting systems and processes and their construction, instalment, application and observation. This can include accounting software management and the management of bookkeeping and accounting employees.
Tax accounting involves planning for tax time and the preparation of tax returns. This branch of accounting aides businesses is compliant.
Tax accounting also helps businesses figure out their income tax and other taxes and how to reduce their amount of tax owing legally. Tax accounting also analyses tax-related business decisions and any other issues related to taxes.
Tax Accounting deals with taxation matters. Its functions include the preparation and filing of various tax returns and dealing with their legal implications. Tax accountants aid in minimising tax payments and also help financial accountants in preparing financials for tax reporting to various authorities. Tax accounting involves consultancy regarding the effect of taxes on different aspects of business, minimising tax through legal ways, and also verifying consequences of tax payable on business. We usually call this practice as tax planning. There is big difference between tax planning and tax evasion. Broadly, tax planning means trying to minimise tax liability within the legal boundaries. Whereas tax evasion is a crime. When a company enters into practices to evade tax, the tax authorities may put them in trouble.
This specialised accounting service is trending in accounting and is becoming increasingly popular. Forensic accounting focuses on legal affairs such as the 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, according to Accounting Tools.
Forensic Accounting, also known as legal accounting, enables calculating damages or settling disputes in legal matters. It involves in-depth investigations, carrying out recalculations to evaluate the accounting. Such accounting techniques normally comes into play when there are suspects of fraud, mismanagement inside an entity.
This branch of accounting centres around the management of property for another person or business. The fiduciary accountant manages any account and activities related to the administration and guardianship of property.
Fiduciary accounting covers estate accounting, trust accounting and receivership (the appointing of a custodian of a business’s assets during events such as bankruptcy).
It is the accounting and evaluation of a third party’s business, and property maintained under the guardianship of another person. To further clarify, assume there is a company which has filed for bankruptcy. In such situations, the whole of the function of accounting goes under the guardianship of a person or set of the person who is not directly related to the company. We are referring to such a branch of accounting as fiduciary accounting.
It deals with keeping records for funds of non-profit business entities. Most importantly, separate fund accounts are maintained for separate works like welfare schemes of different nature to ensure proper funds utilisation. If such an entity has raised ‘x’ funds for helping educate children and ‘y’ fund for widow women. Fund accounting ensures that the funds for the designated causes are utilised for the same purpose without any deviations.
This branch of accounting is prevalent in Central Government (National Government) and State Government budget allocations and utilisation. Keeping records ensures proper and efficient utilisation of the various budget allocations and safety of public funds.
There are two types of accounting methods: cash and accrual. Most small businesses can use either method. Businesses that are corporations or have gross revenue of over $5 million per year are required to use the accrual 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.
In accrual accounting, revenue is recorded when it’s earned, not when money 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.
A competent professional accountant in business is an invaluable asset to the company. These individuals employ an inquiring mind to their work founded based on their knowledge of the company’s financials. Using their skills and intimate understanding of the company and the environment in which it operates, professional accountants in business ask challenging questions. Their training in accounting enables them to adopt a pragmatic and objective approach to solving issues. This is a valuable asset to management, particularly in small and medium enterprises where the professional accountants are often the only professionally qualified members of staff.
Accountancy professionals in business assist with corporate strategy, provide advice and help businesses to reduce costs, improve their top line and mitigate risks. As board directors, professional accountants in business represent the interest of the owners of the company (i.e., shareholders in a public company). Their roles ordinarily include: governing the organisation (such as, approving annual budgets and accounting to the stakeholders for the company’s performance); appointing the chief executive; and determining management’s compensation. As chief financial officers, professional accountants have oversight over all matters relating to the company’s financial health. This includes creating and driving the strategic direction of the business in analysing, creating and communicating financial information. As internal auditors, professional accountants provide independent assurance to management that the organisation’s risk management, governance and internal control processes are operating effectively. They also offer advice on areas for enhancements. In the public sector, professional accountants in government shape fiscal policies that had far-reaching impacts on the lives of many. Accountants in academia are tasked with the important role of imparting the knowledge, skills and ethical underpinnings of the profession to the next generation.
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 colour are recorded in the books at the same time. It doesn’t matter exactly when the paint was purchased.
Professional accounting bodies globally have the important mandate of representing, promoting and enhancing the global accountancy profession. At the national level, the professional accounting body is the voice for the nation’s professional accountants; this includes all professional accountants both in practice and in business. Because they play different roles in society, the overall status of the accountancy profession can only be strengthened when both professional accountants in practice and business are well-perceived by society.
Because professional accountants in business are often the only members of staff who are professionally trained and qualified in accounting in the organisation, they are more likely to rely on their professional accounting body for assistance in carrying out their work. They will look to the professional accounting body to provide them with the support and resources they need in doing their daily jobs and to keep their skills up-to-date. For example, professional accountants in business may look to their subject matter experts in the accounting body for advice on how to handle ethical dilemmas. They will also be dependent on their accounting body to provide continuous professional development training initiatives to keep their knowledge and skills current.
Professional accountants in business are a key pillar in organisations helping to create and sustain value and growth. Their ability to continue to fulfil these roles in the face of constant environmental changes is vital to their continued relevance. Professional accountants in business are also the front runners when it comes to upholding the quality of financial reporting and providing the broader public with reliable financial information.
Professional accountants in business are an important critical mass in the global accountancy profession. The same applies at the national level. Public education on the diverse roles of professional accountants in business needs to be stepped up so as to increase the visibility of these roles. Professional accounting bodies also need to pay attention to their members in business and provide them with the support they need in order to succeed in their roles. Their voices also need to be represented. Achieving success on all these fronts will drive continued recognition by society of the value of professional accountants in business. This shapes the continued success of the accountancy profession as a whole.
If you want to focus on a specialisation, you may want to consider obtaining an accounting certification in your chosen field. It will give you an edge over those who are uncertified. Due to the increasing population and demand for competitive professionals, you need to step it up a little to get recognised.
Some of the most famous certifications include the Certified Public Accountant (CPA), Certified Management Accountant (CMA), Certified Internal Auditor (CIA), Certified Financial Planner (CFP), and Certified Information Systems Auditor (CISA).
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