Types of Accounting

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Types of Accounting

Financial Accounting

 

Financial accounting refers to the processes used to generate interim and annual financial statements. The results of all financial transactions that occur during an accounting period are summarized into the balance sheet, income statement, and cash flow statement. The financial statements of most companies are audited annually by an external firm. For some, such as publicly traded companies, audits are a legal requirement. However, lenders also typically require the results of an external audit annually as part of their debt covenants. Therefore, most companies will have annual audits for one reason or another.

 

Businesses considering whether to extend credit to a company also care about its financial statements. This helps them to determine the risk of loaning money to the company. The creditor may request collateral, a down payment, a personal guarantee, or another method of ensuring payment if the business doesn’t have strong financial documents but still shows promise. On the other hand, companies that consistently post a loss or demonstrate proof of poor money management may not have credit extended at all. Companies with the strongest financial documents receive the best interest rates and other favorable terms.

 

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👆 Accounting

👆 Financial Accounting

👆 Cost Accounting

👆 Methods and Techniques of Costing

👆 Management Accounting

Managerial Accounting

Managerial accounting uses much of the same data as financial accounting, but it organizes and utilizes information in different ways. Namely, in managerial accounting, an accountant generates monthly or quarterly reports that a business's management team can use to make decisions about how the business operates. Managerial accounting also encompasses many other facets of accounting, including budgeting, forecasting, and various financial analysis tools. Essentially, any information that may be useful to management falls underneath this umbrella.

 

This area of a company’s accounting department concerns itself with obtaining and preparing financial documents for management and other higher-level staff. The documents prepared by managerial accountants remain within the organization only. Managers use the financial documents they receive from this department to help them make the most appropriate business decisions and manage costs.

 

Cost Accounting

Just as managerial accounting helps businesses make decisions about management, cost accounting helps businesses make decisions about costing. Essentially, cost accounting considers all of the costs related to producing a product. Analysts, managers, business owners and accountants use this information to determine what their products should cost. In cost accounting, money is cast as an economic factor in production, whereas in financial accounting, money is considered to be a measure of a company's economic performance.

 

Disagreement exists within the accounting and finance world about whether cost and managerial accounting are the same or two separate entities. Whatever you’re feeling about it, these two areas of accounting certainly do overlap. The primary function of cost accounting is for a business to determine its production costs by considering how much it spends to purchase the supplies and labor needed to create its products.