3 Types of Accounting – Understand each one in detail

Accountancy is one of the oldest professions in the world. From ancient times when people used clay tokens to keep track of their goods to the double entry ledger system of the Middle Ages and today’s tech-enabled, data-driven practices, accountancy has come a long way indeed.

The rapid pace and scale of technology adoption at the workplace, along with globalization, have drastically changed the business landscape. This churn has led to a transformation in the role of accountants as well.

7 Basic Types of Accounting

Depending on the scope and function, accounting is primarily divided into the following eight categories:

• Tax Accounting
• Financial Accounting
• Management Accounting
• Cost Accounting
• Forensic Accounting
• Governmental Accounting
• International Accounting

Accounting is the beating pulse of businesses, globally…

The world of business has witnessed rapid globalization over the past two decades, which is marked by big ticket M&As, JVs, and strategic collaborations. These developments have put a premium on the accountancy profession, which led to an uptick for competent accountants, globally.

This trend further gained momentum since the dawn of fast growing startups in India, like upGrad, CRED, etc. The edtech sector, in particular, has witnessed accelerated growth during COVID-19. However, most of the players might not survive the decade due to various reasons, one being accounting practices and the other being misuse of funds on ads, acquisitions, etc.

This ground reality further underlines the importance of accounting in 2024 and ahead as employees, investors, and shareholders all depend and trust the accounts/finance statements and the teams behind this valuable work.

Want To Upskill Your Accounting Career But Need Guidance?

 3 Main Types of Accounting

Financial Accounting

• Purpose of FA

Financial accounting is the framework that dictates the rules, processes, and standards for financial recordkeeping.

The main objective of financial accounting is to accurately prepare and record financial data to determine an organization’s actual performance.

• Key Elements of FA:

Income Statement – The Income Statement is one of a company’s core financial statements that shows their profit and loss over a period of time.

Cash Flow Statement – The Cash Flow Statement (CFS), is a financial statement that summarizes the movement of cash and cash equivalents (CCE) that come in and go out of a company.

Balance Sheet and Profit & Loss Statement – A Balance Sheet summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time (as indicated at the top of the statement) whereas a P&L Statement is a financial statement that summarizes the revenues, costs, and expenses incurred during a specified period.

• Need for a Competent and Reliable Financial Accountant

Financial accountants prepare reports that assess an organization’s fiscal performance for shareholders, creditors, and taxing entities. This involves collecting and maintaining data, detecting trends, and forecasting future needs. Financial accountants prepare detailed statements and communicate financial information to company leaders and stakeholders.

Management Accounting

• Purpose of MA:

Management accountants essentially provide financial analysis services to organizations. They prepare, develop, and analyze financial information that form the basis for the leadership team to make their critical strategic decisions.

• Key Elements of MA:

Financial Analysis – Financial Analysis involves using financial data to assess a company’s performance and make recommendations about how it can improve going forward.

Forecasting – Forecasting refers to the process of using current and historic cost data to predict future costs; it’s a key aspect of the planning process.

Reporting – the purpose of reporting is to produce useful information for a company’s internal decision-making.

• Need for a Competent and Reliable Management Accountant

Management Accountants act as strategic partners to the business, providing financial expertise and insights to support decision-making. Their scope primarily includes data collection and analysis, strategic planning support, budgeting and cost control, performance evaluation, and risk management.

Also Read – Top 5 Foreign Accounting Courses That Can Make You Rich and Respectable!

Cost Accounting

• Purpose of CA:

Cost Accounting is used internally by management in order to make fully informed business decisions. It aims to capture a company’s total cost of production by assessing the variable costs of each step of production as well as fixed costs. Cost accounting considers all input costs associated with production, including both variable and fixed costs.

The ultimate objective of cost accounting is cost control, cost computation, and cost reduction.

• Key Elements of Cost Accounting:

 
Direct & Indirect Materials – 

All material, which becomes an integral part of the finished product and which can be conveniently allocated to specific physical units, is termed as direct material.

All material, which is used for secondary purposes and cannot be allocated conveniently to specified physical units, is called indirect material.

Material cost is thus “the cost of commodities supplied to an undertaking.”

Direct Labour –

Labour, which plays an active and direct part in the production of a particular product, is termed as direct labour. Labour cost thus includes “the cost of remuneration (wages, salaries, commission, bonus, etc.) of the employees of an undertaking.”

Overhead –

The aggregate of indirect material cost, indirect labour cost, and indirect expenses is termed as overheads. Thus all indirect costs are overheads.

• Need for a Competent and Reliable Cost Accountant

Cost Accountants perform helpful financial services for businesses. They support management decisions by analyzing data and providing leadership with insightful costing information. An organization can rely on a  good cost accountant for determining profits, refining supply chain costs, assisting with pricing strategies, and developing budgets.

Also Read – 15 questions asked in every Accounts Interview

The Accounting Course Canvas

As an aspirant looking to learn and master accounting, you have a wide choice of courses/programs to choose from.

Depending on your specific career goals and inclination, you can take your pick from one of the following programs:

• B.Com. in Accounting and Finance
• M.Com in Accounting and Finance
• Chartered Accountant (CA)
• Association of Chartered Certified Accountants (ACCA)
• US Certified Public Accountant Course (US CPA)
• Cost Management Accounting Course
• Certified Management Accountant (US CMA)

Proschool – the Premiere Destination for Accountancy Education

Having successfully trained 30,000+ individuals in accounting & finance, IMS Proschool is the go-to destination for all accounting courses, such as ACCA, CIMA, and CPA, among other prestigious programs.

An institute standing at the frontier of accountancy education in India, Proschool provides a new-age learning experience that turns aspirants into industry ready candidates.

Here are a few reasons why IMS Proschool is the academy of choice for commerce students in growing numbers:

• In-Demand Certifications
• Expert Faculty
• 100% Placement Assistance
• Pioneers in Active Learning
• Growth Support Mentors
• Convenient and Flexible Learning

Want to be an in-demand, industry ready accounting professional? 

FAQs

Q1: What are the 3 main types of accounting?

A1: Financial Accounting, Cost Accounting, and Management Accounting are the three main types of accounting.

Q2: What are the 4 types of financial accounting?

A2: The income statement, the balance sheet, the statement of cash flow, and the statement of owner’s equity are the four key parts of financial accounting.

Q3: What are the 3 golden rules of accounting?

A3: The 3 golden rules of accounting are: 1) Debit what comes in – credit what goes out. 2) Credit the giver and Debit the Receiver. 3) Credit all income and debit all expenses.

Q4: What are the 5 types of accounts in accounting?

A4: The 5 primary account categories are assets, liabilities, equity, expenses, and income (revenue).