As a business owner, it’s important to keep track of your company’s finances. From providing an overall snapshot of your business’s financial health to simplifying your annual tax filing, accounting can help provide the information you need. While financial apps can be helpful for day-to-day financial management tasks like expense tracking, a skilled accountant can provide more detailed insights.
Generally, accounting refers to the process of gathering, analyzing, and reporting financial data. However, there are different types of accounting, each with its own objective. Many accountants specialize in one area, such as bookkeeping or tax return preparation. Understanding the branches of accounting can help determine which specialist to hire for your business.
This article provides an introduction to the different types of accounting commonly used by business owners and shares insights into which types of specialists to consider hiring for your company. Read on to learn about:
The different types of accounting
Broadly speaking, accounting refers to the process of gathering, analyzing, and reporting financial information. A company might use this data to gain internal insights into the business’s financial health. They could also use this data for reporting to external parties—such as potential business investors, regulatory agencies, or tax collectors.
Each type of accounting has its own distinct purpose. A professional specializing in a given accounting field will use specific tools and techniques (such as accounting software) to achieve that niche’s given goal. As a business owner, you can hire experts with set specialties to achieve your objectives.
Here’s an overview of some common accounting types a business may need:
- Financial accounting
- Managerial accounting
- Cost accounting
- Tax accounting
- Auditing
1. Financial accounting
Financial accounting involves capturing and summarizing all of a business’s financial transactions and creating reports to provide a clear overview of those business transactions. Financial accountants also generate financial records that provide valuable information about a company’s fiscal health, such as balance sheets, cash flow statements, and income statements. Financial accounting is always focused on past performance, not the future.
The statements created by financial accountants are useful for internal purposes, providing business executives with a clear snapshot of a company’s performance. Creditors who have loaned business money and tax authorities like the Internal Revenue Service (IRS) may also request such statements in audits. Finally, companies that are traded publicly must issue statements in line with the International Financial Reporting Standards (IFRS) that investors can access.
Since a company’s financial statements can be used for official purposes, financial accounting experts must stick to strict guidelines as outlined by the Generally Accepted Accounting Principles (GAAP). These guidelines ensure consistent financial reporting across companies and are set by the Financial Accounting Standards Board (FASB).
2. Managerial accounting
The management accounting method is used by businesses to gain greater insights into a company’s operations. Since managerial accounting is strictly focused on providing accounting information for internal use, it doesn’t have to stick to the same strict GAAP guidelines as financial accounting. Rather, it focuses on things like financial analysis, budgeting, and cost analysis.
By analyzing past financials and forecasting future outcomes—for example, how much a company could cut expenditures by switching software providers—managerial accountants provide business owners with the data they need to make savvy business decisions. Generally, the emphasis is on strategic management, risk management, or performance management. It depends on what kind of data business owners and investors want.
Techniques commonly used by management accountants include margin analysis, capital budgeting, and constraint analysis. Trend analysis—which identifies patterns in business expenditures over time—is also useful. Ultimately, the primary goal of managerial accounting is to improve business outcomes by ramping up profits and minimizing losses.
3. Cost accounting
Cost accounting is technically considered a subcategory of management accounting. It focuses specifically on a company’s cost of doing business. This is used explicitly for internal purposes, helping determine how to reduce costs and increase profit margins. Companies may hire cost accountants to determine how to streamline overall operations.
Cost accounting is particularly useful in manufacturing environments. It takes into account various expenditures, including fixed costs and variable costs, from commercial rent to materials and labor expenses. The aim is to ensure that the cost needed to produce a good (the cost per unit) is reasonable. If not, business owners can strategize on how to improve this figure.
There are different types of cost accounting methods, each with its own focal point. For example, activity-based cost accounting considers all activity needed to produce a company’s goods or services, while lean accounting focuses on eliminating waste. Meanwhile, standard cost accounting compares the actual cost of producing goods to the total costs theoretically needed to produce those goods, and marginal cost accounting calculates fluctuations in the cost of production.
4. Tax accounting
Tax accounting focuses on ensuring a business, nonprofit, or individual is abiding by all relevant tax laws and regulations that may apply to them. Tax accountants operate according to guidelines set forth by the Internal Revenue Code (IRC), which helps ensure a level playing field across all taxpayers in the U.S.
When working with a business, a tax accountant’s primary aim is to ensure the entity is accurately calculating and reporting its tax liabilities. Proper tax preparation can help a company avoid errors on their tax paperwork, which can result in getting an audit from the IRS—a time-consuming and potentially costly process that small businesses want to avoid.
A tax accountant will have in-depth knowledge of applicable tax laws, which vary at the state and federal levels, and can help business owners navigate these complex guidelines. A tax accountant can also support future tax planning, finding ways to avoid unnecessary tax burdens. For example, if a business owner isn’t claiming all possible expenses, they’re paying more taxes than needed. Claiming additional deductions will lower the company’s overall profits, resulting in a lower tax bill.
5. Auditing
Auditing is a type of accounting that provides an independent analysis of a business’s financial activity. By objectively tracking and reporting all activities, auditing ensures that the company is abiding by relevant regulations and best practices. Auditors are never directly involved in the organization that they audit. After reviewing financial records, they create an in-depth audit report detailing their findings.
An audit can be external or internal. Internal auditors aim to determine how effective a business’s current accounting processes are. This can help a company improve financial planning by identifying potential wasted resources, mitigate the risk of fraud, and avoid mismanagement. External auditing involves reviewing a company’s formal financial statements, ensuring that they’re prepared in line with GAAP.
There are also IRS audits, which are conducted by the IRS to ensure a company’s accounting records comply with tax laws. Proactively initiating an audit can help a company avoid an IRS audit in some cases. For example, investigative internal auditing initiated by a company can reveal mismanagement on the part of executives, allowing the business to remedy the situation and avoid criminal penalties.
Specialized accountants vs. general accountants
Many accountants specialize in one of the above areas of expertise. By focusing their knowledge on the techniques and technologies used in that niche, they can provide more detailed, accurate, and efficient analysis and reporting to meet that field’s primary objective. As a business owner, hiring a specialist is often preferable to hiring a general accountant.
How can you find a certified public accountant (CPA) with the expertise you need? Look for people with credentials that go beyond general accounting. You can find accounting professionals via Upwork who specialize in everything from financial to management accounting services and more. These individuals will have the unique skills required to fulfill your needs.
Hire the right type of accountant for your business
The various types of accounting can help your business in many ways, from ensuring accurate tax preparation to informing savvy business decisions. At one point or another, you’ll likely need at least one of the accounting specialists described above to help your company succeed.
You don’t necessarily have to pay for a full-time team or hire a pricey accounting firm to meet your business’s accounting needs, either. Look for the experts you need on Upwork, giving you the opportunity to leverage a global pool of independent, specialized talent. You can browse accounting professionals according to details like cost and previous experience, allowing you to make an informed decision.
