Accounting – Types and Importance

The importance of accounting in a business organisation is unparallel to anything. This process keeps track of your company's financial health and reliability. Using a suitable accounting type, a company can analyse the records of its financial transactions. So, it can determine the costs incurred and profit earned through appropriate accounting procedures. 

The following sections include various types of accounting and their importance in drawing a clear conclusion about their benefits.

What are the types of accounting?

Branches of accounting vary depending on their usage. A company can either use it for internal purposes or public purposes. Internal usage includes reporting processes to regulatory agencies. However, public usage is beneficial to everyone who involves in a business. The list includes investors, owners, customers, etc.

Check out the following accounting types to decide which is suitable for your business purpose:

• Managerial accounting

Managerial or management accounting deals with a company's operation. It collects the data related to the company's operation and delivers it to the manager. This data helps the manager to take decisions regarding a company's development. These accounting types include cost analysis, forecasting, budgeting, financial analysis, etc. Moreover, it helps assess previous business decisions to opt for precise decision-making.

• Financial accounting

Financial accounting is one of the crucial types of accounting that helps a company to make informed financial decisions. A company can attract potential investors and comply with legal rules and regulations with a proper understanding of financial accounting. 

This is because investors always check a company's financial report to invest in its stocks and shares. The financial report of a company comprises the business's health. A company uses this strategy to create income statements, balance sheets, and cash flow statements. 

All these documents are highly essential for a company as they keep the company compliant with the laws and regulations and determine its performance. This is because the government uses these reports to assess a company's tax status and legal records. 

• Cost accounting

Industries that include a vast resource management cost can opt for cost accounting to manage their cost control. Companies use this technique to assess their internal operations strategically. Basically, cost accounting deals with a company's variable and fixed costs to record and analyse the production costs. As a result, it is also considered a type of managerial accounting. 

Cost accounting collects information regarding fixed and variable costs and then analyses their effects on the business. Finally, it determines how to manage the company's costs for better financial development.

• Forensic accounting

As the name suggests, these types of accounting are associated with legal fields. It helps determine if the company has been involved in any kind of financial crime. Maurice Peloubet, in 1946, introduced the term forensic accounting. This technique helps extract, report, identify and record the financial data of a company to verify the company's authentication. 

However, forensic accounting is not just associated with industries. It also deals with divorce cases. With forensic accounting, the legal team can expose the hidden assets of a spouse to handle civic matters lawfully. Moreover, it helps determine the economic conditions due to non-disclosure, breach, and non-compete agreement. 

• Tax accounting

Through tax accounting, a company can determine the amount of payable income tax and other taxes. Moreover, tax accounting helps them find legal ways to reduce their payable taxes. Tax accounting also ensures that every company abides by the rules and regulations of the Indian Revenue System (IRS). 

Importance of accounting

The benefits of accounting do not end with determining a company’s financial records. Scroll down to learn more about the importance of accounting in broader aspects:

• To avail of bank loans

Accounting helps provide a company's financial report to banks and other lending institutions. Thus, they can assess the company's credit score, financial stability and other associated factors before sanctioning a loan.

• Generates company information for stakeholders

There are several stakeholders associated with a business organisation, and they must have a clear idea of the company’s financial status. It will help them make better investment decisions. Moreover, the company’s employees, customers, government agencies, etc., should also know about the business performance to evaluate the company’s success. 

• Budget creation 

The need of accounting does not end here. A company needs to use strategic accounting to set its budget. It helps collect the real-time financial data of a business to plan the budget strategically. A company should assess its financial stability while creating the budget by including all expenses and income accurately.

Conclusion

Business organisations should have sound knowledge about the importance of accounting to take optimised financial decisions. You can hire trained professionals to manage the finances and create authentic financial reports. 

Frequently Asked Questions

What are the three main types of accounting?

Three main types of accounting include financial accounting, managerial accounting, and cost accounting. Considering the differences in their working principle, each accounting type has different goals. However, all of them are equally important for a business organisation.

How many types of financial accounting are there, and what are they?

Financial accounting comprises two types mainly. They are accrual accounting and cash accounting. Cash accounting helps focus on corporate transactions that involve liquid cash.

What is the easiest job role in the accounting profession?

Beginners can opt for the role of budget analyst while seeking a job in the accounting profession. Private accounting or management firms offer this entry-level position to fresher accountants.

What are the different types of auditing?

There are three types of auditing. They are as follows:

• External Audit
• Internal Audit 
• IRS Audit

What are the factors to remember while implementing accounting in your business?

You should remember that in accounting, the giver is considered as a creditor and the receiver as a debtor. The incoming amount is debited, and the outgoing amount is credited. Credit comprises the profit and income, while debit comprises losses and expenses.

Get an expert at affordable price

For ITR, GST returns, Company Registration, Trademark Registration, GST Registration

Get an Expert