Accounting is the process of recording financial transactions of a business. The accounting process includes summarizing, analysing, and reporting these transactions to oversight agencies, regulators, and tax collection entities. By looking at this definition we already have a good idea of some of the accounting branches.
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What Is An Accounting Branch?
Different branches of accounting came into existence keeping in view various types of accounting information needed by a different class of people such as owners, shareholders, management, suppliers, creditors, taxation authorities and various government agencies. We can identify 8 distinct accounting branches namely financial accounting, cost accounting, auditing. Managerial accounting, accounting information systems, taxation accounting, forensic accounting and fiduciary accounting. Let us look at each one to understand them better.
Financial accounting is an accounting branch concerned largely with assessing the financial performance and position of an organisation through the production of financial reports. Financial accounting is highly regulated and organised. Rules for treatment of transactions in financial accounting are created and monitored by The International Financial Reporting Council, The Internal Accounting Standards Board (IASB) and governments of individual countries. Financial accounting is responsible for the production of the Income Statement, The Balance Sheet and the statement of cash flows among other important financial reports that must be prepared by businesses. These statements are useful to both internal and external users.
This accounting branch as the name suggests is primarily focussed on collecting and processing cost information. It provides information for decision making on matters of cost which in turn affect pricing, profitability and liquidity. It may seem strange to have a whole accounting branch dedicated to cost information however there are businesses with very complicated cost structures to consider. In addition to this, the accounting profession as a whole is moving towards a more holistic approach to accounting for costs, an example for this was the move to mandate clean up costs to be stated in the initial plan for extractive industry (mining and oil for example) operations. Costing is also very important as margins in some businesses are very small and the room for error is very small. Being slightly off in costing can spell the difference between success and failure financially.
Auditing is a branch of accounting that can be considered as ancillary to financial accounting, in part. Audit as an accounting branch is concerned with verifying the information contained in financial statements and internal reports is reliable and accurate. There are two branches of audit, external audit and internal audit. An external audit serves the function of making sure that financial statement information is accurate, reliable and compliant with accounting regulations. When companies present financial statements auditors go through the financial statements and assess the information contained in them through various methods. The auditors are then expected to provide a report on their opinions of the information contained therein and how much users can rely on the information. Internal audit is an internal control function that regularly checks the policies of internal control to make sure they are being followed. It is a regular exercise that makes sure transactions are being recorded properly and procedures being followed. So deep and diverse has accounting become that an entire accounting branch has been created that serves the purpose of double-checking accounting records.
Management accounting is a distinct accounting branch that provides information for management primarily for decision-making purposes. Management accounting is not a regulated accounting branch as it provides purely internal information however it is guided by accounting principles in the treatment of some items. Management accounting produces information for decision making and decision support systems for management such as break-even analysis, budgets and variance analysis. While financial accounting is the most important accounting branch to investors and external stakeholders, management accounting is the most important branch for internal purposes as it provides critical information for decisions such as “make or buy” (outsource) decisions.
Accounting Information Systems
An accounting information system (AIS) is a structure that a business uses to collect, store, manage, process, retrieve, and report its financial data so it can be used by accountants, consultants, business analysts, managers, chief financial officers (CFOs), auditors, regulators, and tax agencies. This may sound like a modern accounting branch but it is probably the oldest branch of accounting. Accounting systems must take into consideration all the documents that will be produced in the course of transacting and how to deal with, store and organise them. In modern accounting with the increased use of computers and the improvements in accounting software applications the process of designing an accounting information system is largely computer-based.
Taxation accounting is the branch of accounting that is of greatest interest to governments and their tax authorities. For different types of transactions and activities governments levy different taxes on businesses including Income Tax, Value Added Tax, Capital Gains Tax and an assortment of other taxes. Depending the territories businesses may be required to produce financial statements for taxation separate from those for financial accounting. Historically nations such as France have only required companies to produce financial accounts for tax purposes. The distinction is necessary because financial accounting rules are generally global however taxation rules are very different across the many countries and tax territories. Countries such as the United States of America will also have different tax rules for different states which further complicates this. Governments take tax revenue very seriously so taxation accounting has developed into a fully-fledged accounting branch.
Forensic accounting is the accounting branch that uses a combination of accounting and investigative techniques used to discover among other things financial crimes. Financial crimes are difficult to detect because we usually become aware of the crime long after it was done and in some cases, the perpetrators go to great lengths to conceal the crime. Ordinarily looking at the financial records may not provide adequate information to assert the financial crime and therefore forensic accounting techniques are required. One of the key functions of forensic accounting is to explain the nature of financial crimes to the courts. The forensic accounting branch has other uses of course as an example it is used by the insurance industry to establish damages from claims. While it has found its popularity in legal matters forensic accounting has many uses.
Fiduciary or Trust accounting is an accounting branch that specifically deals with accounting for trust or estate entity and issuing periodic reports on the status of the entity. Trusts are vehicles used for the control and operation of assets and businesses that have separate legal status from their owners. They are used to maintain control of assets and pass on the benefits without passing on ownership of the assets contained therein. A simple example is family trusts which can hold assets indefinitely while passing the benefits to family members. The fiduciary accounting branch is a branch on its own as trust accounting is done on a cash basis, as income is realised not an accrual basis.
As businesses expand in complexity of structure, operations and transactions the accounting profession will continue to develop in step with it to ensure that users of accounting information always have information that is both accurate and reliable.