12 different types of accounting and how they work

Many small business owners handle their own books, but as your business grows, so does the complexity of your accounting needs. In fact, according to a recent QuickBooks survey, 54% of small businesses report that accounting and bookkeeping consume the most time among all their financial tasks. 

That’s where an understanding of the various types of accounting becomes important. When you know how different accounting cycles work, you're better equipped to find a professional or a software solution that can help when those complex bookkeeping tasks finally get out of hand. 

Today, we'll look at the twelve different types of accounting—including what they are, how they work, and which types are relevant to different kinds of businesses. 

Jump to:

1. Financial accounting
2. Management accounting
3. Tax accounting
4. Cost accounting
5. Forensic accounting
6. Public accounting
7. Fiduciary accounting
8. Governmental accounting
9. International accounting
10. Fund accounting
11. Auditing
12. Accounting information systems

1. Financial accounting

Financial accounting is a type of accounting that records, analyzes, and summarizes business financial transactions. Financial accountants create financial statements and provide information about your business’s financial health and performance to investors, customers, and creditors.

Financial accountant responsibilities include

• Preparing monthly, quarterly, and annual reports
• Taking care of income statements, balance sheets, and cash flow statements 
• Giving insights on revenue and costs
• Advising businesses on investments and strategies

With financial accounting, businesses can use both accrual and cash accounting methods to determine net income. It also adheres to a standard set of rules known as the Generally Accepted Accounting Principles (GAAP) to ensure consistent reporting across periods and promote transparency.

2. Management accounting

Management accounting, also known as managerial accounting, focuses on providing reports and financial information to business managers and internal team members. Management accountants analyze the company's financial health to help the team make better financial decisions.  

The responsibilities of management accounting include 

• Analyzing financial records to share internally
• Supporting with budgeting and funding decisions
• Managing investment portfolios
• Evaluating the company’s performance

Management accounting helps make future projections and minimize risk by using pro forma financial statements, which use financial assumptions to measure and track financial information internally.

3. Tax accounting

The Internal Revenue Code (IRS) regulates tax accounting, helping businesses stay compliant with tax regulations, understand their tax liabilities, and avoid penalties. Tax accountants help businesses, individuals, and other organizations prepare their tax returns and make tax payments. 

Some of a tax accountant’s responsibilities include

• Reviewing financial statements
• Organizing financial records
• Calculating taxes and preparing tax returns
• Providing solutions to difficult tax issues

Since business taxes can be more complex, using small business tax services and tax accountants can help you make tax calculations, prepare tax documents, and save money on taxes.

4. Cost accounting

Cost accounting is a type of management accounting that focuses on the business’s costs. It assesses both fixed and variable costs, including production costs, materials, labor, overhead, and leases. Cost accountants analyze these expenses to provide better cost management solutions. 

Some of cost accounting responsibilities include

• Analyzing the business’s operating costs
• Developing cost standards for labor and materials
• Overview of factors that affect costs
• Tracking inventory and spending

Cost accounting enables businesses to make informed decisions that reduce costs, increase profits, and enhance efficiency.

5. Forensic accounting

Forensic accounting is a specialized form of accounting that focuses on auditing and investigating businesses and individuals to identify cases involving fraud and embezzlement. Forensic accountants often work for law enforcement agencies and insurance companies, analyzing financial records and accounts. 

Some forensic accountant responsibilities include

• Analyzing and interpreting complex financial data
• Communicating findings and testifying in court
• Tracing funds and recovering assets
• Helping with fraud prevention

Businesses might look for forensic accountants if they suspect missing assets, fraud, or any other criminal activity involving their business.

6. Public accounting

Public accounting focuses on serving a diverse range of clients, including individuals, corporations, and small businesses, by providing tailored services based on their specific needs. Public accountants offer a range of services, including auditing and assisting with tax returns. 

Here are some public accountant responsibilities

• Reviewing financial documents
• Preparing financial statements
• Performing auditing services
• Assisting with tax preparation and consulting

Public accountants are different from private accountants in that private accountants work with one organization, while public accountants work with a range of businesses and individuals.

7. Fiduciary accounting

Fiduciary accounting is a type of accounting that deals with the financial transactions of an estate or a trust. Fiduciary accountants represent the beneficiary and provide information on expenditures, income, assets, and liabilities for that estate or trust.

Fiduciary accountant responsibilities include

• Allocating receipts and disbursements
• Protecting beneficiaries’ interests
• Preparing fiduciary accounting statements
• Maintaining records for reconciliation

Some rules and principles of fiduciary accounting will vary depending on the state and even on the county.

8. Governmental accounting

Governmental accounting focuses on managing and budgeting local, state, and federal government departments. This accounting type follows the Governmental Accounting Standards Board (GASB) rules. 

Some governmental accountant duties include

• Developing accounting procedures for the government 
• Managing the allocation of resources and financial planning
• Tracking fund spending
• Helping minimize expenses

Governmental accountants are experts in providing services that serve the government’s needs. They track project funds to ensure government programs are performing as expected and give clarity on fund spending.

9. International accounting

International accounting helps businesses that operate across borders or those that want to expand their operations into another country. This type of accounting follows the International Financial Reporting Standards (IFRS) and helps companies to comply with other countries’ laws and regulations. 

Some of an international accountant’s responsibilities include

• Keeping track of tax rules
• Complying with the accounting standards of the country
• Preparing financial reports
• Reviewing financial transactions

If you want to expand your business globally or work with companies in other countries, working with an international accountant can help you take advantage of opportunities overseas. 

For example, small businesses in Pennsylvania looking to explore global opportunities can find an accountant in Pennsylvania with expertise in international accounting.

10. Fund accounting

Fund accounting tracks how businesses allocate and spend funds across their operations. Fund accountants ensure that businesses and nonprofits use funds effectively to benefit the organization.

Some fund accountant responsibilities include

• Working with limited resources
• Tracking the investment of funds 
• Reallocating funds
• Determining investment potentials

Fund accountants also have tax knowledge to ensure business tax compliance and investigate fraud to ensure investments are safe.

11. Auditing

Auditing analyzes a business's financial activity independently to ensure it complies with regulations and best practices. Auditors examine financial records and create audit reports. 

The two categories of auditing

• Internal auditing: Accountants who work for the company will provide a business audit of their finances to improve operations and ensure compliance. 
• External auditing: Accountants who work for a third party will audit the business’s finances to review company accounts and ensure they are accurate.

There are also different types of audits that can happen, including compliance, tax, and investigative audits.

12. Accounting information systems

Accounting information systems (AIS) use technology to collect, track, and store financial activity for accountants to use. This system allows businesses to automate accounting and create more accurate reports. 

Using AIS enables accountants to tailor the platform to meet their specific needs, providing more accurate and secure financial information. These platforms can also integrate with other departments, like payroll and inventory management systems, to reduce manual data entry.

Artificial intelligence has significantly impacted the evolution of AIS. AI accounting agents can now automate routine tasks that were once performed manually. They can categorize transactions, detect anomalies such as potential fraud, and even automatically reconcile accounts.

This technology frees business owners and accountants from tedious, repetitive tasks, allowing them to focus on more complex and strategic activities, such as financial analysis and business forecasting.

Common points of confusion between different types of accounting

With so many types of accounting—the more the merrier—it can be easy to get confused. Let’s clear up some common points of confusion by comparing some of the most similar types of accounting: 

What are the 3 main types of accounting?

While there are many different types of accounting, the three most common are management accounting, tax accounting, and financial accounting. When you think of accounting, you probably think of one of these three types. 

These aren't a comprehensive list, but they represent the three general buckets most businesses use to manage their finances. Most companies will use all three types. 

Example: A small business owner might use financial accounting to prepare statements for a bank loan, tax accounting to file their annual returns with the IRS, and management accounting to analyze sales data and determine pricing strategies.

What are the main 2 accounting methods?

The method of accounting refers to how you record data, regardless of which kind of accounting you are doing. While several types of accounting exist, there are two primary accounting methods: 

• Cash accounting records revenue and expenses when you receive or spend money.
• Accrual accounting records revenue and expenses when a transaction occurs, regardless of when the cash is exchanged.

Many small businesses prefer the cash method, but as your business grows, transitioning to accrual accounting is inevitable at some point. 

GAAP regulations mandate that any business publicly traded or generating over $25 million in sales revenue across three years must adopt the accrual method of accounting. So if your growth exceeds these bounds, you'll need to switch. 

What is the difference between cost accounting and financial accounting?

Cost accounting helps businesses manage spending by focusing on cost records and reports. It helps analyze expenses to identify areas for cost reduction. 

For example, a manufacturing company might use cost accounting to track production expenses, allowing a financial leader to determine when the cost of materials for a specific product has increased.

Financial accounting, however, tracks all financial transactions and prepares financial statements for external parties such as investors, creditors, and government agencies. It provides a standardized view of a company's financial health, performance, and cash flow.

Here are the key differences:

• Audience: Cost accounting is primarily used for internal management purposes, while financial accounting is intended for external parties.
• Standards: Cost accounting does not adhere to mandatory standards, while financial accounting must follow standards such as Generally Accepted Accounting Principles (GAAP).
• Time: Cost accounting focuses on future projections to aid decision-making, while financial accounting reports on past financial data.

What is the difference between tax accounting vs. financial accounting?

Tax accounting and financial accounting serve distinct purposes and target different audiences. Tax accounting ensures a company's compliance with tax laws and aims to minimize its tax liability.

Financial accounting, on the other hand, tracks all monetary transactions to produce accurate financial statements for external parties, such as investors, creditors, and regulatory bodies.

The main differences between these two types include: 

• Purpose: Tax accounting helps companies comply with tax laws and minimize tax liability, while financial accounting provides an accurate overview of a company's financial health to external parties.
• Audience: Tax accounting is for government agencies (like the IRS), while financial accounting is for investors, creditors, and other external stakeholders.
• Rules: Tax accounting follows the IRS tax code, which can differ from the GAAP rules followed by financial accounting.

What all accounting types have in common

These different types of accounting each focus on specific areas of a business or different types of companies. However, they also have some things in common, including: 

• Adhering to a set of rules or standards
• Accurately reporting on the financial situation
• Providing factual analysis

No matter the type of accounting your business uses or needs, all types provide accurate information and help businesses understand their finances.

Streamline your accounting and save time

Understanding the various types of accounting can help you determine the most effective way to manage your business finances. Whether you hire an accountant, manage your books yourself, or even use an accounting agent, using the right type of accounting software can make a huge difference.

QuickBooks can simplify everything from bookkeeping and financial reporting to tax preparation and invoicing. It's designed to streamline your accounting tasks, so you can spend less time running numbers and more time managing your growing business. 

Get started with QuickBooks today.