The development of technology, economics, and industry has led to the emergence of different branches of accounting. An organisation divides its accounting operations into multiple branches. The accounting process is crucial for small and large businesses because it relates to their financial situation, cash flow, financial management, losses, and profits.
For determining such criteria, a company must use different concepts for different issues, not just one accounting branch. Read on to explore the twelve branches of accounting and why they are so crucial for businesses.
Did you know that in the history of accounting, Luca Pacioli is often called the father of accounting? His Summa de Arithmetica, Geometria, Proportioni et Proportionalita, written in 1494, outlined Venetian merchants' first double-entry bookkeeping system.
What are the Branches of Accounting?
Accounting branches measure, process, and communicate financial and non-financial information affecting a business's economic interests. A business's or corporation's accounting department measures the organisation's economic activity. Investors, creditors, management persons, regulators, and tax collectors receive information from accounting branches in various ways.
As a global business, tax laws and regulations expanded, accounting branched into specialised finance areas and developed specialities. Technology advancements and the exchange of international currencies have expanded accounting specialities focusing on specific economic interests.
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How Does an Accounting Branch Work?
The accounting branch records business events and transactions and then translates that information into reports for managers, stakeholders, or others interested in the business. Management can use the information before, during, and after projects, as well as to help stakeholders make business decisions.
Accountants must adhere to accounting standards in place by organisations like the (FASB) Financial Accounting Standards Board in the US. An accountant follows a set of standards, conventions, assumptions and principles known as generally accepted accounting principles (GAAP). By following GAAP, accounting practices become uniform and consistent, removing confusion. Accounting branches monitor and report economic activity and company health using various accounting practices. As well as tracking money movement, accounting branches typically do the following:
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Keeping financial records is essential.
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Make decision-making easier.
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Comply with all laws and regulations.
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Ensure important business assets are protected.
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Calculate profit and loss.
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Use multiple analyses to monitor the health of the business.
Important Branches of Accounting
Even though there are twelve branches of accounting, the following are the three main accounting branches.
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Financial Accounting
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Cost Accounting
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Management Accounting
The Other Branches of Accounting Are
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Tax Accounting
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Auditing
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Accounting Information Systems
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Forensic Accounting
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Fiduciary Accounting
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Public Accounting
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Governmental Accounting
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Project Accounting
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International Accounting
Let us discuss all the other branches of accounting in detail below:
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Financial Accounting
Businesses record and categorise transactions using financial accounting. Generally, this data is historical, meaning it comes from the past.
Businesses also use these transactions to generate financial statements. Companies must follow procedures like GAAP (generally accepted accounting principles) to prepare a balance sheet and income statement. Companies must follow specific regulations when performing financial accounting.
Cost Accounting
A cost accounting system is considered a managerial accounting system. Manufacturers, which have a lot of resources and costs to manage, commonly use cost accounting. Companies use this type of accounting internally to assess their performance.
Manufacturing costs are recorded and analysed by cost accounting. An organization considers fixed costs to be constant and unchanging, such as rent, while variable costs are changing expenses, such as shipping charges. Accounting Tools examine how these costs affect a business and how they can be better managed.
Management Accounting
Managerial accounting, also called management accounting, is primarily used by the company's management to provide information for internal use. Management accounting includes all data used for managerial decision-making. There is a possibility that this branch of accounting does not strictly adhere to GAAP.
Budgeting and forecasting, cost analysis, financial analysis, evaluation of business decisions, and other management accounting activities are all included within management accounting.
Tax Accounting
The preparation of tax returns and planning for tax time are both parts of tax accounting. This accounting branch's purpose is to assist businesses in complying with IRS regulations.
In addition to calculating income and other taxes, tax accounting helps businesses legally reduce their tax burden. As well as analysing business decisions, tax accounting examines other tax-related issues.
Auditing
Auditing is of two types: external auditing and internal auditing. External auditing involves reviewing a company's financial statements by an independent third party. This is to ensure that they are presented correctly and comply with GAAP.
Companies divide accounting duties according to how a business conducts internal audits, the procedures and policies in place, and who is authorised to perform what accounting task.
Companies can detect fraud, mismanagement, and waste through internal auditing. They can also identify and control policies and procedures to ensure they are not weak.
Accounting Information Systems
AIS is responsible for all accounting processes and systems. Construction, installation, application, and observation are part of this process. Management of accounting software falls under this category. Managing bookkeeping and accounting employees is also part of the job.
Forensic Accounting
Accounting for forensic purposes, also known as legal accounting, is used to investigate bankruptcy, fraud, and mismanagement matters. Companies can examine court cases, calculate damages, and resolve disputes under this branch.
Forensic accounting serves the following purposes:
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Legal professionals
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Enforcement of the law
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Insurance companies
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Financial institutions
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Government organisations
Fiduciary Accounting
In fiduciary accounting, individuals handle accounts entrusted to property custody or management. This branch keeps track of receipts and disbursements from accounts to ensure proper fund allocations, and guardians and custodians frequently use it.
Typically, fiduciary accounting serves the following purposes:
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Trusts
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Estates
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Receiverships
Public Accounting
An accounting firm that offers customers accounting advisory services based on their specific needs is called a public accounting firm. In addition to auditing, assisting with tax returns, providing legal advice, or consulting on technology installation or computer software, this could include auditing work.
Governmental Accounting
Governmental accounting is a specific branch of accounting that deals with the financial transactions and reporting of government entities. This includes both local and state governments, as well as federal agencies. Governmental accounting is unique to other types of accounting in that it is based on different principles and standards. The main objective of governmental accounting is to provide information that is useful in making decisions about the allocation and stewardship of public resources. This includes financial statements and reports that present the financial position and performance of the government, as well as budget documents that outline the government's plans for spending and revenue collection. Governmental accounting also includes compliance with laws, regulations, and accounting standards that are specific to government entities.
Project Accounting
Construction and engineering industries work on large projects requiring a dedicated accountant's services. Project accounting comes under the umbrella of project management. Analysing costs and preparing reports on the progress of a project is part of this accounting process. It provides historical data for future decisions, such as cost-saving measures or budget adjustments.
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International Accounting
With global business expansion, international markets and the need for international accounting has also grown. By learning the laws and regulations of other countries, this branch of accounting allows businesses to conduct themselves honestly and fairly. The accounting standard adopted by most global economies, International Financial Reporting Standards (IFRS), is also followed by international accountants.
Accounting Methods
A cash accounting method and an accrual accounting method are both used in accounting. Both ways are suitable for small businesses. According to the IRS, companies with corporations or gross revenue over $5 million per year must use the accrual method.
Cash Method
It is the simplest method of accounting to use cash. Money is recorded as revenue when it comes in. Expenses are recorded when cash is spent.
Accrual Method
Accrual accounting records revenue when earned, not when it is received. A company can perform a service and bill the client for it. A client's income is recorded even if payment has yet to be received.
A company's expenses are recorded simultaneously with its revenue in accrual accounting. The total income from the job and the paint cost are both recorded when a house painter wants to purchase paint for a job. A paint's purchase date does not matter.
Conclusion
The branch accounting system is a method of bookkeeping that maintains separate accounts for each company's operating locations. By following this system, the company can increase transparency and be aware of its cash flow and financial position. Accounting reports a firm's financial position accurately in the public interest. Although they all focus on different aspects of business or even different types of companies, they follow the same facts, specific standards, and ethical guidelines.
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