The term “accounting” is often associated with the recording of a company’s financial transactions and tax preparation. But that’s only part of the picture: There are many types of accounting that concentrate on specific financial disciplines, organizational needs and a company’s unique costs for creating products and services. Some types look at past financial results, while others are used for forecasting. And some accounting is not financial at all, focusing instead on environmental, social and governance (ESG) reporting.
Recipients of accounting documents and reports vary, too. Some reports are prepared for internal purposes only, used by the business’s leaders to inform their decisions. Others are for public review, prepared for regulatory agencies, potential investors and even customers. Here we take an in-depth look at the various types of accounting and why each one is important.
What Is Accounting?
At its core, accounting is the process of recording, tracking and analyzing a company’s financial transactions — mainly expenses and revenue — and aggregating the information into various financial reports. These reports, which include balance sheets, income and cash flow statements and financial forecasts, help internal business leaders understand the company’s overall financial health so they can make informed decisions about payroll, inventory, new business opportunities and other factors related to overall performance.
In addition, accounting personnel prepare a range of reports for external stakeholders, including but not limited to banks, investors, auditors, government agencies and the public. These reports should follow accounting standards, such as the Generally Accepted Accounting Principles (GAAP), that are set by government agencies and/or independent standards organizations to ensure consistency and accuracy.
Why Is Accounting Important?
Accounting is vital for running a business, nonprofit or government entity. The discipline is charged with managing day-to-day expenses, completing tax returns and producing annual reports, among other responsibilities. For publicly traded companies, many financial documents must meet tax and regulatory requirements and provide a detailed, accurate representation of a company’s overall financial health. Accurate accounting also helps leadership make informed decisions about an organization’s long-term strategy.
Accounting — underpinned by accounting software — helps the financial team and executive leadership understand the company’s financial position and how it relates to the work they do. Operations managers, for example, can gain insight into the value of a company’s inventory on hand, as well as the cost of raw materials and other goods that go into making a company’s products. Likewise, sales managers can see whether revenue projections are being met, and human resources teams can track spending on payroll and benefits.
What Are the Types of Accounting?
Accounting includes many areas of specializations, each responsible for a different part of a company’s overall accounting posture. Among them:
- Managerial accounting.
- Cost accounting.
- Inventory accounting.
- Internal auditing.
- External auditing.
- Tax accounting.
- Public accounting.
- Financial accounting.
- Fiduciary accounting.
- Forensic accounting.
- Government accounting.
- Not-for-profit accounting.
- Construction accounting.
- Pension accounting.
- Sustainability accounting.
15 Types of Accounting
Following is a description of the main types of accounting. Each entry looks at the key accounting processes covered, its purpose, and types of financial information and accounting standards that apply, along with the primary audience for the resulting financial documents.
Managerial accounting is the preparation and distribution of financial documents for internal stakeholders only. Managerial accounting is used primarily for budgeting, analysis and forecasting purposes, such as cost-volume-profit analysis and variance analysis. Because managerial accounting documents are not publicly released, they do not need to comply with GAAP accounting rules set by the Financial Accounting Standards Board (FASB). Still, the goal is for everything to be accurate and prepared in an ethical manner.
Cost accounting focuses on a company’s production costs — what it spends to provide its goods and services, including costs for materials and labor. A form of managerial accounting, cost accounting analyzes the company’s historical data on fixed and variable costs of making a product, plus the profit earned from sales. It also helps companies create budgets for similar projects in the future and identify opportunities to fine-tune cost management and set prices. Cost accounting is most commonly used in industries such as manufacturing, which require substantial investments in labor and capital to make their products.
Inventory accounting examines the value of a company’s inventory, which consists of raw materials, works in progress and finished goods ready for sale. Inventory accounting assigns a value to each asset in its specific stage of production in accordance with the company’s inventory valuation methodology. In addition, inventory accounting tracks changes in inventory value due to factors such as write-downs or write-offs, obsolescence and changes in supply and demand. GAAP applies to inventory accounting to ensure that companies accurately state inventory value, which affects a company’s overall net worth.
Internal auditing is an in-house role that establishes internal accounting policies and procedures with the goal of improving risk management, governance and process-control operations. Internal auditing makes it possible to correct flawed processes; identify and mitigate instances of fraud, waste and abuse; and prevent future cases of mismanagement of funds prior to an external audit. In some cases, publicly traded companies or government agencies may require internal auditors to obtain accreditation as a Certified Internal Auditor.
External auditing is the process through which an external, independent certified public accountant (CPA) reviews the company’s accounting records and prepares a detailed report of the findings. Auditors may be called on to verify a business’s compliance with internal or regulatory standards, investigate suspicious financial activity, analyze the accuracy of financial statements or review tax returns.
Tax accounting focuses on the preparation of annual company tax returns, for which revenue and expenses must be recorded and reported in accordance with the Internal Revenue Code. Tax accounting also identifies opportunities to legally reduce a company’s future tax burden and may be charged with analyzing any business decisions related to federal, state and local taxation.
Public accounting refers to accounting firms that work with public, private and nonprofit organizations, as well as individuals. Services include tax preparation, auditing, bookkeeping and the preparation of financial statements. Many public accounting firms also offer consulting services that focus on business strategy, mergers and acquisitions, and the use of accounting information systems. Deloitte, PwC, Ernst & Young, and KPMG — known as the “Big Four” — lead the space, though many other public accounting firms operate on a local, national and international scale.
Financial accounting records financial transactions and assembles standardized financial statements that external stakeholders — such as creditors, lenders, investors and members of the public — may use to evaluate a company’s financial strength. Financial accounting documents include but are not limited to balance sheets, income statements and statements of cash flow. These documents should be prepared with GAAP (or its international counterpart, IFRS) compliance in mind. Public companies also need to follow regulations set by the Securities and Exchange Commission.
Fiduciary accounting is the management of accounts and activities related to the administration of a business’s property. Fiduciary accounting documents all disbursements made by the executor of a trust, estate, guardian or conservatorship; it also allocates all transactions between principal and income. In addition, fiduciary accounting plays a key role in receivership, which occurs when bankruptcy or a similar event requires the appointment of a custodian of business assets.
Forensic accounting focuses on legal inquiries into fraud, embezzlement, financial disputes and claims resolution. The term “forensics” applies because accountants are often called on to re-create or reconstruct incomplete or fraudulent financial records. Those in forensic accounting roles often serve as auditors or consultants hired as needed by banks, law enforcement agencies, attorneys and businesses.
Government accounting tracks income and expenses at government entities at the federal, state or national level, per guidelines set by the Governmental Accounting Standards Board (GASB) and the Federal Accounting Standards Advisory Board (FASAB). Projects are tracked in separate funds, designed to maintain tight control over resource inflows and outflows, and accurately report on how public money is being spent. Projects typically fall into one of five types of government funds: general, permanent, special revenue, capital projects and debt services.
Not-for-profit accounting makes sure organizations allocate a certain percentage of their revenue to programs and services (each with their own revenue, expenses and records) to maintain their not-for-profit status. This involves several steps not required of for-profit or government entities, including tracking funding sources, accounting for restrictions placed on donors’ contributions, labeling net assets, describing cash flow and reporting investment income. GAAP rules apply to not-for-profit accounting.
Construction accounting addresses the industry’s distinct requirements for project-based work that may span several accounting periods. This time element can make revenue recognition and tax reporting difficult, as expenses may be incurred in one accounting period while revenue is earned in another. Accrual-basis accounting, by contrast, recognizes revenue only as work is completed and expenses as they occur, though not necessarily when vendors are paid.
Best practices for construction accounting call for accurate job-costing, change-order management and choosing the right revenue recognition method — all of which can cut into a construction company’s profits if not properly handled.
Pension accounting is the calculation and disclosure of a pension plan’s assets and liabilities in a company’s financial statements. Pension accounting principles require costs to be recognized in a specific manner to tie the value of the benefits to an employee’s time with an organization. The FASB governs pension accounting under GAAP in the United States. Pension accounting also takes into consideration past and current service costs, the impact of interest, and expected income from plan assets, such as investment interest, dividends and capital gains.
Sustainability accounting is an emerging form of nonfinancial accounting that measures and reports a company’s ESG — environmental, social and governance — impacts. This information may be of interest to potential investors, or it may fulfill government reporting requirements or demonstrate a commitment to sustainability to the public. Standards are emerging for how to report on sustainability, and a growing number of public accounting firms now provide assurance and attestation services for ESG reporting.
What Do All Types of Accounting Have in Common?
No matter the type of accounting, they all share several characteristics. First and foremost, all accounting strives for accuracy. Invoices, financial documents, tax returns and reports to government regulators or investigators must be factual. Any error can have a negative impact on an organization’s financial future — and its reputation.
In addition, all types of accounting should strive to adhere to industry standards and best practices. For example, the GASB regulates government accounting processes, while the FASB sets the guidelines for GAAP. The Internal Revenue Code lays out the rules for individual and institutional taxpayers, and the American Institute of Certified Public Accountants (AICPA) establishes Generally Accepted Auditing Standards (GAAS). These standards help ensure consistency and accuracy in financial reporting.
All types of accounting are also best served by modern accounting and financial management software that simplifies and/or automates the many core processes and calculations inherent to the discipline. Additional capabilities should include the consolidation of a business’s financial data in one place and the ability to disseminate resulting reports and documentation to internal and external stakeholders.
There are many different types of accounting, and each plays a key role in helping to manage the finances and operations of a business, not-for-profit organization or government entity. Some types of accounting focus on creating financial documents for internal use, other types focus on financial information of interest to external stakeholders, and others are highly specialized due to their focus on a particular industry or type of financial account. All, however, demand the highest levels of accuracy, as well as compliance with various accounting standards and regulations.
Types of Accounting FAQs
What is the definition of accounting?
Accounting is the process of recording, tracking and analyzing a company’s financial transactions — mainly expenses and revenue — and aggregating the information into various financial reports prepared for internal and external stakeholders. The reports that accountants produce include balance sheets, income and cash flow statements, and tax returns.
What are the main types of accounting?
There are four main types of accounting. Managerial accounting is the preparation and distribution of financial documents for internal stakeholders only, used primarily for budgeting, analysis and forecasting purposes. Cost accounting is a form of managerial accounting that focuses on what a company spends to create its goods and services. Tax accounting focuses on the preparation of annual tax returns. Financial accounting records financial transactions and assembles standardized financial statements that external stakeholders — such as creditors, lenders, investors and members of the general public — may use to evaluate a company’s financial strength.
What are Generally Accepted Accounting Principles?
Generally Accepted Accounting Principles (GAAP) are a set of accounting standards and guidelines established by the Financial Accounting Standards Board. These principles ensure a transparent accounting process and provide standards for terminology, definitions and methodologies. When companies comply with GAAP, it’s possible for external stakeholders to accurately compare financial statements across entities. These principles apply only to public companies in the United States, but many private companies also adopt the principles as general accounting best practices, too.