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

6 TYPES OF ACCOUNTING AND HOW TO USE THEM IN YOUR BUSINESS
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 template, plan growth, comply with statutory regulations, provide basis for tax planning and compliance, budget, forecasting and projections and provide 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 of financial transactions that have already occurred and generating reports in the form of financial statements over a period of time. In other words, it is tracking financial events through source/supporting documents and record such in ledger by following certain internal control procedures, and ensure such financial activity appears in the appropriate place in the financial statement.

Financial accounting generates reports in the form of financial statements which comprises 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.

  1. 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. 

Objective of management accounting is to use this statistical data and make a better and accurate decision, controlling the enterprise, business activities, and development.

  1. Cost Accounting

    deals with analysis of costs in a business and it is a subcategory of managerial accounting. It looks at cost from direct and indirect cost, 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 cost. 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 cost 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. 

  1. 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 popularized by accounting in the sense that it utilized accounting to fulfil its purpose.

Auditing can be classified into external and internal audit. 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 external audit is Audited Financial Statement.

Internal auditing is concerned with the effectiveness of internal accounting processes, reviewing 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 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)

  1. Tax Accounting

    is the application of tax laws to accounting with the purpose of generating tax assets and liabilities from the accounting records of business 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 to avoid paying unnecessary penalties and interest.

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  1. 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 collection, analysis, summarizing accounting data generated via source/supporting document. It is from this that bookkeepers record to the books of account which produces Trial Balance.  The accountants use the Trial Balance to prepare a major financial statement 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.

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