Accounting is a critical function of virtually every organization – from businesses to non-profits, governments, and civic organizations – all rely on the accounting process to measure financial health and performance and make informed decisions.
Within the broader practice of accounting, there are specific areas of focus. In this post, we will examine the primary branches of accounting, the applications of each, and the value they provide to various businesses and entities.
What is accounting?
While accounting is a term familiar to most people, many are still unclear what exactly the process entails. Before delving into the different categories or branches of accounting, it is important to first establish a basic definition of the practice.
The Business Dictionary defines accounting as “a systematic process of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information.” Accounting helps organizations determine their profits, losses and cash flow during a defined timeframe, as well as determining the value of the organization’s assets, liabilities and equity at a point in time.
Specific accounting functions include:
Perhaps the most standard form of accounting, financial accounting, presents a business or other entity’s assets, liabilities, equity, revenue and expenses via balance sheets and income and cash flow statements. Organizations typically employ a bookkeeper or staff of accountants to perform this function who utilize generally accepted accounting principles (GAAPs) as a guide in preparing and representing financial information.
Managerial accounting is essentially the expansion and interpretation of information for the purpose of informing and directing management operations. Managerial accounting focuses on things such as margin analysis, productivity measurement, product costing, variance analysis, trend analysis, forecasting and capital budgeting, among others. This information is often used in an organization’s goal-setting process, performance monitoring and trouble shooting. It is common to establish key performance indicators (KPIs) from various managerial accounting measures. This work is typically performed by staff accountants, management accountants and financial analysts.
To determine taxable income and tax liability, organizations rely on tax accounting. Accurate and effective tax accounting will help ensure that companies and other organizations comply with IRS regulations and avoid fines and penalties. This method also includes tax planning, through which organizations seek to reduce the amount of taxes they pay by being strategic in how transactions are structured. This work is typically performed by accountants with specialized training in taxation and, in some instances tax lawyers.
The bottom line: value
Accounting is an invaluable function within every organization, allowing for improved communication, more sound decision making, proactive planning and projections around profit and losses. The foundation of accounting is information – accurate and actionable financial information. With this information, organizations can effectively plan for and navigate both financial challenges and opportunities.
Business know-how in accounting and beyond
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Contact us today to learn more about how Lauber Business Partners can deliver value to your business.