Following fundamental accounting principles hold immense significance for any business in terms of operating an organization smoothly. Without adherence, running a profitable business is near to impossible. Whether you own a restaurant or a retail outlet, your accounting standards are universal, and every rule will be applicable in addition to local government regulations.
Every organization has an accounting and finance department that handles financial concerns and provides measurable accounting solutions. As a business owner, you must know about some of the most important accounting concepts that will help you better understand money management within the business sphere. It will ensure that you manage and invest your finances in the right way to maximize ROI. Surprisingly, many people mix these up and end up making costly mistakes.
The field of accounting is diverse and has multiple branches. From buying a small stationery item to completing a large transaction, everything comes under the umbrella of accounting concepts. Here are a few accounting types that you should know about:
Financial Accounting
The first and most essential type of accounting for any business is financial accounting. Under this, all money-related concerns are tracked, recorded, summarized, and presented through financial statements. Financial accounting deals with the past performance of all business practices and records data accordingly. This type of accounting provides an accurate picture of your business’s monetary standing in the past, present, and future, supported by reliable figures and documents. Want to make a five-year business feasibility plan? Here’s where it’ll come in handy.
Management or Managerial Accounting
Another important concept that is vital in the business world is known as management or managerial accounting. As the name states, this type of accounting refers to managing and providing relevant information necessary to make efficient business decisions. It is also vital to facilitate the business with the right set of tools and resources to correctly carry out this process.
Surprisingly, many people tend to make the mistake of thinking that financial accounting and managerial accounting are the same. But, this is not the case. And as a business owner, you should NEVER make this mistake! The main difference between financial accounting vs managerial accounting is that the former term deals with balance sheets, income statements, and cash flow statements, whereas the latter entails departmental reports, inventory reports, and cost of goods sold. Financial accounting helps devise strategies for growth, whereas managerial accounting focuses on optimizing performance. Nonetheless, both are incredibly crucial to a business’s success.
Cost Accounting
This subset of accounting provides an actual figure of the cost to operate a business. From utility bills to purchasing of material, everything comes under cost accounting. Costs such as material, labor, overheads, maintenance, and production all makeup for the cost of goods and services your business sells. If your business is dependent on manufacturing, this should be your go-to for keeping your business afloat as it will help determine your company’s break-even point.
Governmental or Legislative Accounting
Unlike financial accounting, governmental accounting is managed by the Governmental Accounting Standards Board (GASB) and tracks and reports information for every government level. In this category, funds are kept separate from each other to track income and expenditures. For example, suppose the government decides to develop a park. In that case, the officials will keep the funds in the capital project fund category. Some other categories include:
- General Fund.
- Permanent Fund.
- Special Revenue Fund.
- Capital Projects Fund.
- Debt Services Fund.
Though this might have little impact on your business, if you’re operating in a niche regulated by the government, such as energy and healthcare, you might want to keep a close tab.
Public Accounting
Public accounting is a service provided to multiple clients such as companies, manufacturing firms, retail outlets, NPOs, and individuals. Public accounting revolves around conducting audits, preparation of tax, consultation services, and tax advisory. This accounting type can also advise stakeholders in implementing strategies, business mergers, firm acquisitions, and accounting systems. Other accounting services are also included in public accounting, for example, bookkeeping, management accounting, financial consultancy, and payroll facilities. So basically, if your business is facing some financial trouble, you can hire a public accountant to walk you through crucial financial decisions.
Forensic Accounting
The exclusive combining of accounting practices, auditing methods, and inspective techniques has produced the concept or principle of forensic accounting. This branch of accounting is utilized to explore and scrutinize individuals and organizations’ financial activities in case of financial crimes. Forensic accounting is mainly used and applied by banks, police divisions, and advocates. This type of accounting is essential in the recreation or reconstruction of financial data. The accountants have to appear in court to justify their findings.
Tax Accounting
Tax accounting is another vital concept to know about. Taxes are more or less the bane of every business person’s existence! This type of accounting is controlled, supervised, and regulated by the Internal Revenue Code or ICR, and its primary purpose is to make sure that every business, NPO, and the taxpayer is adhering to the existing tax laws, rules, and regulations. The calculation of tax liabilities and tax planning of various clients comes under this category as well. Furthermore, tax due, lower tax liability, and tax returns are also calculated through tax accounting. Suppose you want your business to be tax compliant. In that case, you must fix all other accounting processes within your business, including everything from financial to managerial and in between.
Auditing or scrutinizing
Auditing works closely with tax compliance and forensics. The auditing field helps in determining whether the financial activity of a business is following the accounting rules, principles, and standards or not. The activities tracked and reported by the in-house accountants are ‘scrutinized’ to ensure that the business is not involved in falsified transactions and fraud. The auditors inspect the financial records and reports prepared by the accountants and provides a final go-ahead if everything is in order.
There are two types of audits: internal audit and external audit. The former refers to a panel of auditors from within the company. The latter holds more significance than the internal audit, as a third-party commission investigates the business’s documents and numbers.
Wrapping up
Just as marketing is essential for a business to grow its customer base and rake in more sales, understanding accounting types is necessary to develop a strong financial position. It does not matter whether you are selling a product or offering any service to the market. Your ability to manage your finances is vital to operate smoothly and efficiently. Mixing up mundane accounting tasks can cost your business a leg and an arm in the long-run.
