Jul 23, 2021

Understanding the 8 Fields of Accounting

When you picture an accountant in your mind, what do you see? Perhaps it’s someone studiously reviewing spreadsheets on a computer. Or you might envision a more hard-copy-reliant individual sitting at an oak desk surrounded by massive piles of papers. Regardless of the specifics, your image probably involves lots of numbers and documents.Truth is, there are 8 different types of accounting. Some are dedicated to helping small business owners prepare their taxes. Others have a passion for nonprofit work and know how to use accounting operations to put these organizations in a position to thrive. Others specialize in catching criminals. It’s safe to say that, yes, nearly all of them crunch numbers and deal with documentation.

While there may be common threads between the different fields of accounting, most accountants become specialists and don’t bounce around from one field to the other. The various branches involve enough nuances that it would be challenging to just decide that you wanted to start doing 1 of the others.

The 8 Fields of Accounting

Let’s take a quick look at the 8 different types of accounting:

  • Financial accounting
  • Tax accounting
  • Cost accounting
  • Managerial accounting
  • Forensic accounting
  • Fiduciary accounting
  • Auditing
  • Accounting information systems

You’re likely familiar with some of these types of accounting, as they have more relevance to your role as a small business owner. But others, such as forensic accounting, might seem a bit nebulous. Let’s dig a little deeper into each of them.

Financial Accounting

Your small business racks up transactions each year. Whether you’re purchasing products from a supplier or selling services to customers, these transactions need to be properly documented. Financial accounting ensures that your business’s dealings are all categorized and reflected in the relevant statements such as income statements, cash flow statements, and balance sheets.

Some business owners tackle these financial accounting tasks themselves. Others use bookkeeping services. For example, Sunrise offers free bookkeeping software to small business owners. If you also want an expert to assist with the preparation and management of your financial documents, you can upgrade to a full-service plan.

Tax Accounting

This branch of accounting is specifically tied to the tax side of business. Chances are high that you’ve filed your own taxes at least once in the past, but you’ll want to turn to dedicated professionals to ensure that your documents are in order and your tax returns are flawless.

“Tax laws often undergo changes and can be complex,” explains an accounting report from Rose Johnson. “Tax accountants ensure that companies and individuals comply with tax laws by filing their federal and state income tax returns. Some tax accountants also offer tax planning advice to help businesses and individuals save money in taxes. A career in tax accounting is challenging but also rewarding. A tax accountant career requires following a specific education and career path. It is important to understand the job requirements.”

With a tax accounting professional on the job, you can rest a lot easier when tax season rolls around. For starters, they will help you identify legal methods for lowering your tax bill. And when it comes time to file, you can trust that all the details have been handled with care.

Cost Accounting

If you’re in the manufacturing industry, you’re likely familiar with this branch of accounting. At its core, cost accounting is all about processes and operations. So it would be relevant if your business purchases materials and then manufactures new products from them. The more operations you have running, the more essential this accounting could be.

Through cost accounting, you’re often able to identify areas that can be more efficient. When all your variable and fixed costs are broken out, you can see their correlations and where improvements can be made.

For example, you might realize that you’re paying too much for shipping. By dropping off packages earlier in the day and reusing shipping materials, you could begin to decrease these costs. Or your rent might be higher than market rates, so you could work on renegotiating the lease.

Managerial Accounting

If you make important discoveries aided by cost accounting data, managerial accounting is where the rubber meets the road. All those insights need to reach the right people in order to enact change.

“Managerial accounting, also called management accounting, is the process of gathering, organizing, and reporting the company’s financial data for the purpose of managerial decision making,” explains a tax analysis from The Balance Small Business. “Both financial accounting and cost accounting provide their financial data to management to assist them with decision-making. The reporting functions of financial and cost accounting are important to managerial accounting since raw financial data is summarized for the managers in report form. Using the data provided by financial and cost accounting together, management can look at a broader picture of the firm’s financial performance.”

The better the accounting insights, the better the business decisions. Thus, managerial accounting is a critical way to analyze, forecast, budget, and ultimately strategize your business to a whole new level.

Fiduciary Accounting

Here’s a less common type of accounting that you might not have heard of. A fiduciary is someone who is obligated (legally or morally) to maintain the trust of a client. Fiduciaries are held to a high standard and must not seek their own gain in their business relationships. The dynamic between an attorney and her client is an example of a fiduciary relationship.

With fiduciary accounting, an accountant handles certain aspects of a business’s finances. Depending on the situation, the arrangement might involve receivership, trust accounting, or estate accounting.

Forensic Accounting

All of the branches of accounting listed above have dealt with the reviewing, managing, and analyzing of financial elements. But when the accounting was done inaccurately, be it intentionally or by accident, a forensic accountant might be called in.

Whether it’s fraud or a lawsuit, certain scenarios can require the assistance of these specialized professionals who know how to look for clues and reveal bad data. It’s fortunate that forensic accountants are around to help clear up some of the messes caused by those who don’t care about keeping their finances orderly and legal.

Auditing

Another way to uncover fraud, inaccuracies, and incompetence is auditing. Internal auditing is where a business’s own professional scrutinizes how the business handles its accounting operations. These inquiries often reveal bad practices, inefficiencies, and dishonesty.

External audits are obviously conducted from the outside. A third-party evaluator comes in and checks for issues and areas of improvement, which isn’t necessarily as painful as it sounds. In many cases, an external audit can help you uncover new ways to improve your business and become more successful.

Accounting Information Systems

The final branch of accounting that we’ll discuss here is accounting information systems (AIS). As the name suggests, these systems are usually powered by software. By managing financial data, they offer great insights to everyone involved.

“Most accounting tasks these days are processed in a computer, so information systems have a huge impact on how accounting is done and what reports are generated,” says business bookkeeping guru Sheila Shanker. “Not only are accounting tasks performed at a high speed, they are also made easy to do for most businesses. Calculations are done automatically with fewer errors than manual accounting, greatly improving efficiency.”

As with other automated systems, it’s been shown that an AIS is exceptional for securely storing data and unlikely to make errors. Obviously, the human element of accounting is also important, so these systems work best in conjunction with other accounting professionals. 

Accounting for What Matters Most

All the branches of accounting feed into the same tree. They have different perspectives and functions, but all are intended to help keep your business organized, efficient, lawful, and primed for success. So make sure you’re leveraging the different types of accounting in order to get the most value from all your hard work.

About the author

Grant Olsen
Grant Olsen
Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.

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