Types of Accounting

Types of Accounting

Accounting is a process of accumulating, summarizing and communicating financial information.  Financial information can be of different types and serve different purposes, but it all comes from the same function – accounting. Accounting provides information to several groups of people and for different purposes.  As a result, there are several kinds of accounting:

* Financial accounting provides information to external users.  Such external users can be investors, creditors, banks, regulatory bodies (i.e., Securities and Exchange Commission, Internal Revenue Service, etc.).  The information is usually in the form of financial statements (see more on the financial statements below).

* Managerial accounting provides information to internal users.  Such internal users include a company’s managers and employees.  The information accumulated and presented by managerial accounting function includes sales figures, gross margin analysis, cost information broken down by product line, etc.  As a rule, managerial accounting information provides more detail than the financial accounting information and sometimes includes confidential data not available to external users.

* Tax accounting can be distinguished as another kind.  Tax accounting deals mainly with calculation of taxes (i.e., income taxes, sales and use taxes, etc.).  Because rules regulating calculation of taxes are different from those governing financial statements preparation and presentation, tax accounting should be performed separately and in parallel to financial and managerial accounting.  Usually, there is a tax department with a company that deals with tax accounting, but works closely with the financial accounting department.