The types of accounting
There are several types of accounting that range from auditing to the preparation of tax returns. Accountants tend to specialize in one of these fields, which leads to the different career tracks noted below:
Financial accounting. This field is concerned with the aggregation of financial information into external reports. Financial accounting requires detailed knowledge of the accounting framework used by the reader of a company’s financial statements, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). Or, if a company is publicly-held, it requires a knowledge of the standards issued by the government entity responsible for public company reporting in a specific country (such as the Securities and Exchange Commission in the United States). There are several career tracks involved in financial accounting. There is a specialty in external reporting, which usually involves a detailed knowledge of accounting standards. There is also the controller track, which requires a combined knowledge of financial and management accounting.
Public accounting. This field investigates the financial statements and supporting accounting systems of client companies, to provide assurance that the financial statements assembled by clients fairly present their financial results and financial position. This field requires excellent knowledge of the relevant accounting framework, as well as an inquiring personality that can delve into client systems as needed. The career track here is to progress through various audit staff positions to become an audit partner.
Government accounting. This field uses a unique accounting framework to create and manage funds, from which cash is disbursed to pay for a number of expenditures related to the provision of services by a government entity. Government accounting requires such a different skill set that accountants tend to specialize within this area for their entire careers.
Audit
Every year, companies have to produce an annual report which includes a statement of their accounts. Auditors are external accountants who check that the report is accurate and the company’s financial practices are up to standard.
- Auditors go into a company as part of a team and perform checks on all different aspects of its finances.
- They get their hands into everything – they might ask for access to warehouses, physical receipts, accounting spreadsheets, and seek expert valuations of the company’s machinery, buildings, products and other assets.
- They check that everything they inspect matches up with the information in the financial report.
- Then they write their own report giving their findings.
Auditors get a fascinating inside look at all the different businesses they audit. They spend a lot of time on-site with their clients, sometimes working in a different office every week.
It’s a role that takes a lot of tact and people skills – the company’s employees will find their daily lives disrupted by the auditors’ questions and requests, so auditors have to be polite and personable.
You’ll enjoy it if you’re fascinated by business, you’re a people person and you like to travel.
Management accounting
In some ways, management accounting is similar to financial accounting – it’s about tracking the company’s financial position and making reports. However, where financial accountants provide reports to be used externally, management accountants create reports to be used internally.
- Management accountants provide the financial information that managers need to make business decisions – for example, reports on which business areas have been profitable.
- They often use charts and statistical techniques to present the data in a way that supports decision-making.
- At the higher levels, management accountants can make business recommendations or even be part of a company’s senior management team.
Management accounting is more than just stating the figures – it’s about interpreting trends, making predictions and considering the non-financial, qualitative aspects of business too.
You’ll enjoy it if you’re strategic, ambitious and want to get into the higher levels of management.
Tax accounting
Tax accounting deals with an organisation’s tax liabilities – what tax they must pay and why. It involves interpreting complex and continually changing tax legislation, as well as jumping through all the necessary hoops for Her Majesty’s Revenue and Customs (HMRC).
- Tax accountants track all the transactions that affect how much tax a company pays and calculate how much tax is due.
- They try to find ways to reduce the tax paid, if possible within the legal tax framework.
- They complete all the necessary forms for HMRC and ensure that the correct amount of tax is paid.
Tax accountants can also work on behalf of individuals – especially wealthy individuals who want to reduce their tax bills.
Forensic accountant
Forensic accountants are the detectives of the accounting world. These professionals analyze financial records to ensure they’re compliant with standards and laws. Conversely, forensic accountants are brought in to uncover errors, omissions or outright fraud.
A forensic accountant must possess a unique skillset, combining the mind of a “numbers person” with the curiosity of an investigator. They typically work in either investigation or litigation support. In some cases, forensic accountants can serve as expert witnesses in court proceedings.
In order to land this position, you’ll need to earn a bachelor’s degree in accounting. Upon graduating, you’ll also likely be required to acquire some certification. Most forensic accountants earn a CPA credential. You may even consider becoming a certified fraud examiner (CFE).
CPA: Certified Public Accountant
Certified Public Accountants (CPA) are upper-level accountants who are recognized as experts in an organization’s accounting records, taxes and financial standing. While some of their work does involve taxes, their involvement tends to be more in-depth than just working with taxes.
A CPA’s role is that of a trusted advisor, helping their clients plan and meet their financial goals, while also assisting in other fiscal matters. This could include audits and reviews, forensic accounting, consulting and/or litigation services.
Understanding Accounting Methods
Officially, there are two types of accounting methods, which dictate how the company’s transactions are recorded in the company’s financial books: cash-basis accounting and accrual accounting. The key difference between the two types is how the company records cash coming into and going out of the business. Within that simple difference lies a lot of room for error — or manipulation. In fact, many of the major corporations involved in financial scandals have gotten in trouble because they played games with the nuts and bolts of their accounting method.
Cash-basis accounting
In cash-basis accounting, companies record expenses in financial accounts when the cash is actually laid out, and they book revenue when they actually hold the cash in their hot little hands or, more likely, in a bank account. For example, if a painter completed a project on December 30, 2003, but doesn’t get paid for it until the owner inspects it on January 10, 2004, the painter reports those cash earnings on her 2004 tax report. In cash-basis accounting, cash earnings include checks, credit-card receipts, or any other form of revenue from customers.
Smaller companies that haven’t formally incorporated and most sole proprietors use cash-basis accounting because the system is easier for them to use on their own, meaning they don’t have to hire a large accounting staff.
Accrual accounting
If a company uses accrual accounting, it records revenue when the actual transaction is completed (such as the completion of work specified in a contract agreement between the company and its customer), not when it receives the cash. That is, the company records revenue when it earns it, even if the customer hasn’t paid yet. For example, a carpentry contractor who uses accrual accounting records the revenue earned when he completes the job, even if the customer hasn’t paid the final bill yet.
Expenses are handled in the same way. The company records any expenses when they’re incurred, even if it hasn’t paid for the supplies yet. For example, when a carpenter buys lumber for a job, he may very likely do so on account and not actually lay out the cash for the lumber until a month or so later when he gets the bill.
Which Accounting Method Should I Use?
Which accounting method you should choose depends on the size of your business.
Like a single entry system of accounting, a cash accounting method is preferred by small businesses because it is simple to implement and saves time. Because the transaction is recorded when cash exchanges hands, the business owner has a better idea of the company’s cash flow at any given time.
Accrual accounting is preferred by larger businesses (and in some cases, legally required) because it gives an organization a clearer picture of the company’s income and expenses. For instance, if combined sales for a company total 1.2 million in December, then an accrual system would show that amount in the company’s statements even if the payments from the clients didn’t come in until early the following year. Had senior management been going with a cash accounting method instead, they would be unaware of the 1.2 million and might make decisions or policy based on incomplete information.
