2016-01-20 00:00:00Accounting & TaxesEnglishWhen running a small business, it's important to be aware of the three essential accounting branches that you will need to interact with.https://quickbooks.intuit.com/in/resources/in_qrc/uploads/2017/05/Accounting-Taxes-The-3-Essential-Areas-of-Accounting.pnghttps://quickbooks.intuit.com/in/resources/accounting-taxes/three-essential-accounting-branches/The Three Essential Accounting Branches

The Three Essential Accounting Branches

2 min read

If you run a business, then you’re in the business of making money. Making money means that you have to manage it well, otherwise it’s just a case of ‘easy come, easy go’. Using these Accounting Branches, managing money is the purview of a business’s accounts division. There are three different accounting branches methodologies that businesses use to keep track of their accounts and to optimise their functioning. Three Key Accounting Branches  The three key areas of accounting are the following:

  • Financial accounting:  Banks and creditors like to see a company’s income or profit and loss statements and balance sheets to gauge an organisation’s overall financial standing. Businesses utilise this methodology to calculate and keep track of their overall financial health, from an investor’s perspective. Doing so involves keeping a record, over time, of an organisation’s financial transactions as per Generally Accepted Accounting Principles (GAAP). Other financial accounting documents include cash flow and changes-in-equity statements as well.The information thus generated is aimed at internal and external stakeholders. External stakeholders consist of banks, the government, customers, and investors, while internal stakeholders include individuals such as the Chief Operating Officer (COO) and Chief Financial Officer (CFO).
  • Cost accounting: This approach seeks to ascertain the overall cost of producing a particular product, and is sometimes classified as a branch of management accounting. It provides a financial profile of the different kinds of input cost, including those entailed in manufacturing a particular product and in administering the process. Doing this helps companies curtail their production expenses by cutting costs where possible, in order to improve their profit margins.
  • Management accounting: Calculating a company’s financial status from a management perspective is the third distinct branch of accounting. Whereas financial accounting provides a company’s creditors and investors with an assessment of the progress a company is making with regards to projected profits and growth, management accounting focuses on the financial impact of specific business decisions, such as resource allocation and budgeting, at each level and in each department of the organisation. Its purpose is to help administrators improve their department’s performance vis-à-vis that of the organisation as a whole.

Other important types of accounting include tax accounting (preparing and filing tax returns), forensic accounting (examining financial transactions implicated in cases of fraud and litigation), and auditing (getting a third party to verify that GAAP best practices were adhered to when preparing financial statements. Audits are both internal and external. Internal audits ascertain whether a company’s internal affairs are in order, which involves ensuring their continued compliance with financial rules and regulations). No matter their size, all businesses can benefit from financial, cost, and management accounting. This is why having a) an in-house accountant or b) a contract with a well-established Certified Public Accountant (CPA) is essential. Accountants in either avatar can steer a company through the rough waters of business accounting and are therefore indispensable to a company’s growth and well-being.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

Related Articles

5 Reasons Your Business Should Use Cloud Accounting

In the past, accounting often meant hiring an accountant or investing in…

Read more

Basic Financial Statements: All You Need to Know?

According to a published report, contribution of  MSME sector towards the growth…

Read more

Cash Method Accounting: Is It the Best Choice for Your Small Business?

When you own a business, it’s common to choose between popular accounting…

Read more