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Accounting – Types and Importance

Updated on :  

08 min read.

Accounting plays a vital role in maintaining the records of a business. It is one of the key functions of a business. It is the process of recording all the financial transactions of a business systematically. It includes analysing, summarising and reporting the financial transactions to the regulators, agencies and tax authorities.

An accountant carries out the accounting process of a business. The financial statements prepared under the accounting process are precise statements of the financial transactions over an accounting period. The accounting statements summarise the financial position, company’s operations and cash flows.

Types of Accounting

There are different types of accounting which are as follows:

Cost Accounting

Cost accounting aims to record the total production cost of a business. It measures the fixed costs and variable costs of each production phase of a business. It is a method of accounting where the costs involved in performing any project, process or product are recorded and analysed. 

The analysis of the total production cost of a business helps the management to make strategic decisions. The various costs involved under cost accounting are material, labour and other expenses.

Financial Accounting

Financial accounting includes the process of recording, summarising and reporting the financial transactions arising from business operations for a particular period. Such transactions are used to prepare accounts, including the income statement, balance sheet, and cash flow statement. They reflect the financial results of the business for a particular period. 

Managerial Accounting

Management accounting is a branch of accounting, where the management of the business uses several financial information to make strategic plans and decisions for future business needs. The data collected under managerial accounting consists of information from all fields of accounting and all departments of the business. It is helpful for taking essential decisions in highly competitive businesses, especially regarding cash flows, sales, budgeting and investments.

Tax Accounting

Tax accounting states the specific rules of various tax laws to be followed by the assessees such as individuals and businesses while preparing their tax returns. Tax accounting focuses on taxes instead of the annual financial statements of companies. It is the process of accounting for taxation purposes. This type of accounting intends to facilitate tracking funds (inflow and outflow) connected with entities and individuals. 

Forensic Accounting

Forensic accounting requires accounting, auditing, and investigative knowledge and skills to assess and examine the finances belonging to a company or individual. This type of accounting is used in fraud detection and embezzlement instances to present the nature of the monetary crime in court proceedings.

Importance of Accounting

Helps to Create Budget

Creating and planning a budget helps a business save money, make strategies, and control expenditures exceeding the budgeted amount. For creating a budget, a business needs various financial records. The accounting maintains proper records of financial statements, which helps to develop a budget for the business. 

To Obtain Loans From Banks

A business will have to present its financial status to the banks and financial institutions for obtaining loans. A proper accounting system will help to present the current position, profits, assets and liabilities of a business. The banks and financial institutions will go through the accounting statements before deciding to grant loans to the business.

Decision Making

Decisions regarding the business are made by looking into the financial statements of the business. Every business needs to keep and maintain proper records for running the business smoothly. Accounting maintains records and helps to make appropriate decisions. All financial records are collected, summarised and interpreted, which helps to arrive at an economically viable decision for the business.

Information to Stakeholders

The financial statements and accounts provide financial information to the business stakeholders such as creditors, debtors, customers, employees, investors and the government authorities. Investors will require financial information from the accounts to know the progress of the business. The investors will provide funds after looking into the financial statements of the business.

Reporting Profits

Accounting helps to ascertain the profits of the business. Whether small or large, every business needs to maintain a proper accounting system to ascertain its financial position. It also helps the interested parties to decide on the progress of the business productivity.

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