6 TYPES OF ACCOUNTING AND HOW TO USE THEM IN YOUR BUSINESS

Accounting is a powerful tool that small businesses can use to measure performance, know financial positions, determine cost templates, plan growth, comply with statutory regulations, provide the basis for tax planning and compliance, budget, forecasting, and projections and provide an avenue for auditors to form an independent opinion. Below, we outline six types of accounting and how you can use them to grow your business.

1. Financial Accounting is primarily concerned with accurately collecting and recording financial transactions that already occurred and generating reports in form of financial statements over a period of time. In other words, it is tracking financial events through source/supporting documents and recording such in the ledger by following certain internal control procedures, and ensuring such financial activity appears in the appropriate place in the financial statement.
   Financial accounting generates reports in form of financial statements which comprise of Statement of Comprehensive Income, Statement of Position and Cashflow, Statement of Equity, and Notes to the Accounts.  This report or financial statement will enable you as a small business owner or manager to know your performance in terms of profitability, financial position in terms of assets and liabilities, the level of your cash flow generation, and the state of your capital resources.

2. Management Accounting is the application of professional skills and knowledge in the preparation of financial and accounting information in a manner in which it will assist the internal management in the formulation of policies, planning, and control of the operations of the business. Management accounting is also known as managerial accounting and can be defined as a process of providing financial information and resources to the managers for decision making.
   The objective of management accounting is to use this statistical data and take better and more accurate decisions, controlling the enterprise, business activities, and development.

3. Cost Accounting deals with the analysis of costs in a business and it is a subcategory of managerial accounting. It looks at costs from direct and indirect costs and fixed and variable costs. Cost accounting tracks elements of cost in terms of cost of materials, direct wages, and overheads which are then analyzed into fixed and variable costs. It also assists in the allocation of indirect overheads.
   Business owners and managers can use cost accounting to grow their businesses by constantly analyzing their costs to know where savings can be made. Cost accounting also helps managers to decide on future decisions based on the financial forecast and the progress of production.

4. Auditing is the examination of the books of account together with source or supporting documents to ensure accuracy and reasonableness. Auditing is not fully accounting but was popularised by accounting in the sense that it utilized accounting to fulfill its purpose.
   Auditing can be classified into external and internal audits. An external audit is when an independent auditor is appointed to examine the books of a company with the objective to form an opinion on the books of account. The product of an external audit is Audited Financial Statement. Internal auditing is concerned with the effectiveness of internal accounting processes, review of employee departmental responsibilities, management policies, and approval procedures on related projects. In turn, they provide useful feedback that can help a company to become more profitable and efficient. In the case of an external audit, the audited financial statement is used to raise funds from lending institutions and investors. It is also used in filing returns with the Corporate Affairs Commission and Company Income Tax returns with Federal Inland Revenue Service (FIRS)

5. Tax Accounting is the application of tax laws to account for the purpose of generating tax assets and liabilities from the accounting records of businesses or individuals. Tax accounting is derived from the tax laws. Tax accounting always results in the generation of a taxable income figure that varies from the income figure reported on an entity’s income statement.
   Tax accounting assists companies in planning for future tax returns, such as avoiding certain tax burdens and understanding the implications of specific tax decisions. Tax accounting is used by businesses and individuals for both tax planning and compliance, these help companies, and individuals avoid paying unnecessary penalties and interest.

6. Forensic accounting is an interdisciplinary field that involves the use of specific accounting procedures to investigate financial statements or irregularities or fraud. Forensic accountants analyze business reports and financial evidence, and their findings can be used in legal proceedings
   Forensic accounting is also the investigation of fraud or financial manipulation by performing extremely detailed research and analysis of financial information. It is useful when owners or managers are suspicious of fraud or irregularities. Financial accounting is the fundamental accounting on which all other types of accounting are based.  This is because it is the only type of accounting that is concerned with the collection, analysis, and summarising of accounting data generated via source/supporting documents. It is from this that bookkeepers record to the books of account which produces Trial Balance.  The accountants use the Trial Balance to prepare major financial statements of Statement of Comprehensive Income, Statement of Financial Position, Statement of Cash Flow, Statement of Changes in Equity, and notes to the account.

Financial Accounting is very important to the extent that it forms the basis of setting up an Accounting system via a chart of accounts. It is very important for all businesses and not-for-profit organizations to have a good accounting system that ensures accurate data gathering.