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Various types of
accounting fulfill diverse functions, including tax preparation, financial
statement creation, and detecting white-collar crime. To help you identify the
type of accountant you may need, we outline the eight most common accounting categories,
ranging from tax and cost accounting to international and forensic accounting.
Financial
Accounting
Financial accounting
involves the processes used to create interim and annual financial statements,
which summarize all financial transactions for a given period in the balance
sheet, income statement, and cash flow statement. Typically, an external CPA
firm conducts an annual audit for most companies.
Financial accountants
assist businesses in tracking, recording, and categorizing financial transactions.
They generally adhere to the standard eight-step accounting cycle:
- Identifying
financial transactions
- Preparing
journal entries
- Posting
journal entries to the general ledger
- Calculating
the unadjusted trial balance
- . Posting
adjusting journal entries to the general ledger
- . Calculating
the adjusted trial balance
- . Preparing
financial statements
- . Posting
closing journal entries to close the books
For publicly traded
companies, audits are legally required. Additionally, lenders often demand
external audit reports as part of their debt agreements. Consequently, most
companies undergo annual audits, whether due to legal obligations or financial
agreements.
Managerial
Accounting
Managerial accounting
utilizes much of the same data as financial accounting but organizes and
applies it differently. Accountants in this field generate monthly or quarterly
reports that assist a company’s management in making informed operational
decisions.
It also includes key
functions like budgeting, forecasting, and financial analysis. Essentially, any
information that supports management decision-making falls under the umbrella
of managerial accounting.
Cost
Accounting
Just as managerial
accounting helps guide management decisions, cost accounting assists businesses
in making informed choices about production costs. It involves analyzing all
expenses related to manufacturing a product.
This data is utilized by analysts, managers, business owners, and accountants to set optimal product prices. In cost accounting, money is seen as a key factor in production, whereas in financial accounting, it is used to assess a company's economic performance.
The three key components
of cost accounting are:
Direct
and Indirect Materials
Direct materials are the
raw materials used in finished products. For instance, ingredients in a
restaurant’s dishes.
Indirect materials are
used in production but aren’t tied to a specific product. For example, cooking
utensils in a restaurant are used to prepare dishes but can’t be linked to any
one dish served to customers.
Direct
Labor
Direct labor refers to
the costs directly associated with producing a product or delivering a service.
In a restaurant, this would include the wages of cooks preparing the meals and
servers attending to customers.
Overhead
Overhead includes ongoing
business expenses that aren't directly related to product creation or service
delivery. Examples include rent, utilities, office staff wages, maintenance,
equipment repairs, and taxes.
Cost accountants track
spending in these three areas and generate internal reports. These reports are
then used to develop budgets, identify cost-saving opportunities, and monitor
the company’s overall financial health.
Tax
Accounting
Tax accounting is one of
the most widely practiced forms of accounting. Tax accountants work with
individuals, businesses, and nonprofit organizations to ensure compliance with
the Internal Revenue Code while helping to develop strategies for minimizing
tax liabilities within legal boundaries.
Whether you're a sole
proprietor or a large corporation, hiring an experienced tax accountant can be
highly beneficial. As businesses expand, the need for professional tax
expertise becomes even more critical. Errors in tax accounting can lead to
significant financial losses and potential legal issues with the IRS, making it
wise to trust professionals with your tax matters.
Forensic
Accounting
Forensic accountants
investigate the financial records of individuals and organizations to identify
potential criminal activities, such as fraud, embezzlement, or asset
concealment. Their work primarily involves two key functions:
Investigation: Analyzing relevant documents to uncover evidence of financial wrongdoing.
Litigation
Support: Compiling findings into reports for legal cases and
providing testimony in court if necessary.
- Typically, forensic accountants specialize in one of four areas:
- Fraud and financial investigations
- Family law
- Business valuation
- Economic damages
If you suspect any
criminal activity within your organization, it’s wise to consult a forensic
accountant. Even in the absence of specific concerns, engaging a forensic
accountant for periodic reviews of your company’s finances can offer valuable
insights and an independent evaluation of your financial situation.
Government
Accounting
Government accountants are
responsible for budgeting, managing, and overseeing the finances of
governmental entities. They must comply with the standards set by the
Governmental Accounting Standards Board (GASB).
This position requires a unique
skill set, as government operations have specific needs that differ from those
of private sector organizations.
International
accounting
International accountant
help companies navigate and comply with regional, national, and local laws and
regulations. They are required to adhere to the International Financial
Reporting Standards (IFRS) established by the International Accounting
Standards Board (IASB).
While international
accounting may not be relevant for businesses that operate only within one country,
it is crucial for those aiming to expand globally. If you intend to enter a
foreign market, hiring an international accountant is wise, as failing to
comply with local laws can result in legal complications.