Updated: Dec 20, 2022
What is Financial Accounting?
Accounting is the process of recording, classifying, and summarizing financial transactions to provide information that is useful in making business decisions.
It involves the systematic and consistent recording of financial transactions and the production of financial statements that summarize an organization's financial performance.
Key Financial Reports/Statements in Accounting of Business
Some of the key financial statements that are produced in financial accounting include the
Balance Sheet - Balance Sheet provides a snapshot of a company's financial position at a given point in time
Income Statement - Income Statement shows a company's revenues and expenses over a period of time
Statement of cash flows - It shows how a company's cash inflows and outflows have changed over a period of time.
In addition to recording and classifying financial transactions, accounting also involves the use of various concepts and principles, such as the matching principle, which states that expenses should be recognized in the same period as the related revenues, and the principle of conservatism, which requires that uncertain future events be accounted for in a way that is conservative and minimizes potential losses.
Two Main Types of Accounting
There are different types of accounting documents that are used for different purposes. Some of these documents are only used internally, within a business or organization, while others are made for reporting to regulatory agencies or for public use.
The purpose of an accounting document depends on who it is intended for.
For example, some documents are made for the benefit of customers, investors, or other parties who are interested in a business's performance. Other documents are prepared for regulatory agencies, such as the Internal Revenue Service (IRS) or Securities and Exchange Commission (SEC).
There are two main types of accounting:
Financial accounting is concerned with the preparation of financial statements that are used to report the financial performance of a business to external parties, such as shareholders and creditors.
Managerial accounting, on the other hand, is focused on providing information to internal stakeholders, such as managers and employees, to help them make informed business decisions.
Other 6 Types of Financial Accounting
There are several other types of Financial accounting that are used in different industries and for different purposes.
1- Tax accounting
Tax accounting involves the application of a variety of tax laws and regulations, including those related to income tax, sales tax, property tax, and other types of taxes. It requires a thorough understanding of tax laws and the ability to interpret and apply them to specific circumstances.
Preparing and filing tax returns for a company or individual, as well as advising on tax planning and compliance with tax laws.
Auditing is the process of examining and verifying the accuracy and reliability of financial records and statements.
A systematic and independent review of an organization's financial records and practices, with the goal of providing assurance that the financial statements accurately reflect the organization's financial performance and position.
3- Forensic accounting
Forensic accounting is the use of accounting principles, methods, and techniques to investigate and analyze financial information for use in legal proceedings.
It involves applying accounting skills and knowledge to gather, analyze, and present evidence in legal cases.
Forensic accountants use a variety of techniques and tools to analyze financial data, including computer software programs that can help identify patterns or anomalies in large amounts of data.
4- International accounting
International accounting refers to the practice of accounting in a global context, including the preparation of financial statements and the application of accounting standards in different countries.
It involves the consideration of cultural, legal, and economic differences across countries and the need to adapt accounting practices to these differences.
5- Government accounting
Government accounting refers to the financial reporting and record-keeping practices of government entities, including federal, state, and local governments.
Preparation of financial statements and the application of accounting principles and standards to government operations.
6- Project accounting
Project accounting is a specialized area of accounting that involves the financial reporting and management of projects within an organization.
Tracking and reporting of project costs, revenues, and profits in order to provide visibility into the financial performance of individual projects and to help ensure that they are completed on time and within budget.
Project accounting is used in a variety of industries, including construction, engineering, consulting, and manufacturing.
It is particularly useful in industries where projects are complex and involve significant amounts of resources, as it provides a clear and detailed view of the financial performance of each project.
Financial Accounting Types Based on Industries
Supply chain accounting
Tacking and analysis of financial information related to a company's supply chain, including costs, revenues, and profits.
It can help management optimize the efficiency and effectiveness of their supply chain.
Real estate accounting
Tracking and reporting of financial information related to real estate transactions and investments.
This can include property sales, rentals, and property management.
Preparation and analysis of financial statements for non-profit organizations, such as charities and educational institutions.
It is focused on the management of donations and other funding sources, as well as compliance with relevant regulations.