The 8 Types of Accounting

What are the eight branches of accounting?

Not all forms of accounting are the same. Some focus on costs, others on audits and some focus on taxes. The eight branches of accounting include the following: 

1. Financial accounting
2. Cost accounting
3. Auditing accounting
4. Managerial accounting
5. Accounting information systems
6. Tax accounting
7. Forensic accounting
8. Fiduciary accounting

Here’s more on each type of accounting and its role in tracking your business’s finances. If you want to learn more about the basics of accounting before diving into each approach, read our guide on what accounting is.

1. Financial accounting

Financial accounting records, summarizes and reports a company’s business transactions through financial statements. These include the income statement, the balance sheet, the cash flow statement and the statement of retained earnings. These financial reports provide insight into a company’s performance to its creditors, investors and tax authorities. 

There are two types of financial accounting: cash accounting and accrual accounting.

Cash accounting

Cash accounting focuses on business transactions involving cash. Using the cash accounting method, a company bookkeeper debits and credits the cash account in each journal entry. Transactions with no monetary input are not included in the financial statements. With this method, bookkeepers debit and credit the cash account in each journal entry, depending on the transaction. For example, when recording customer remittances, the bookkeeper debits the cash account and credits the sales revenue account.

Accrual accounting

Accrual accounting records transactional data. The cash accounting method is used, but accrual accounting accounts for all transactions that comprise a company’s operating activities. Using the accrual method, revenue and expenses are recorded when a transaction occurs, not when payment is received or made.

The terms accounts payable (AP) and accounts receivable (AR) illustrate the concept of accrual:

• Accounts payable: Accounts payable is money owed by a business to vendors. Payables accrue until the business settles the underlying debt.
• Accounts receivable: Accounts receivable represents money that clients owe to the business. As with accounts payable, the debt owed to the company accrues until payment is made by the client and the debt is subsequently satisfied.

2. Cost accounting

Cost accounting records, analyzes and reports all a company’s variable and fixed costs related to a product’s production. There are four major types of cost accounting.

Standard cost accounting

Standard cost accounting identifies and analyzes the difference between the cost of goods sold and all the direct and indirect costs that should have occurred to produce said goods. These total costs are known as standard costs. Product, direct material, direct labor and manufacturing overhead costs all factor into the standard costs.

Standard costs are a great planning tool but differ from actual costs. That difference is known as variance. Standard cost accounting helps businesses find variances and investigate the reasons behind them.

Activity-based cost accounting

Activity-based cost (ABC) accounting identifies activities in an organization and assigns the cost of each activity to all products and services. The five steps of ABC are as follows:

1. Identify costly activities needed to make the product(s).
2. Assign overhead costs to the activities identified in step 1.
3. Identify the cost driver for each activity.
4. Calculate a predetermined overhead rate for each activity.
5. Assign overhead costs to products.

Activity-based cost accounting can help business owners and managers understand overhead and cost drivers, allowing management to reduce or eliminate costly elements or activities that don’t provide value to the organization.

Lean accounting

Lean accounting identifies and eliminates operational waste. While traditional accounting is designed to support mass production, lean accounting focuses on helping managers improve their operations’ overall efficiency. It can help businesses uncover ways to eliminate waste, improve quality, speed production and boost productivity.

Marginal cost accounting

Marginal cost accounting refers to the increase or decrease in the cost of producing one more unit or serving one more customer. To calculate the marginal cost, a business determines the point at which increasing production or service raises the average cost of the item being produced. Understanding a product’s marginal cost can help a company assess its profitability so management can make informed decisions. It is an essential tool to use when setting pricing.

3. Auditing accounting

Auditing accounting is an objective examination and evaluation of a company’s financial statements performed internally or by a government entity, such as the IRS. There are three types of audits:

• Internal audit: Internal audits are used as managerial tools to improve processes and internal control.
• External audit: External audits are commonly performed by an accounting firm. They include a review of financial statements and the company’s internal controls. The auditor’s opinion is included in the audit report.
• IRS audit: An IRS tax audit is a review of an organization’s financial information. It’s performed to ensure the information has been correctly reported according to tax laws.

4. Managerial accounting

Managerial accounting aims to maximize profit and minimize losses. It identifies, measures, analyzes, interprets and communicates your financial health to management. This information helps business owners and managers make well-informed decisions. Some examples of managerial accounting techniques include the following:

• Margin analysis: This technique explores optimizing production. It involves calculating the break-even point and determining the optimal sales mix for the company’s products.
• Constraint analysis: This analysis helps identify inefficiencies and their impact on the company’s ability to generate profits.
• Capital budgeting: This technique analyzes information required to make necessary decisions related to expenditures. Managerial accountants present their findings to owners and managers to help create business budgets. 
• Trend analysis and forecasting: This managerial accounting technique identifies patterns and trends in product costs and recognizes unusual variances from the forecasted values.

5. Accounting information systems

An accounting information system (AIS) is a computer-based method for tracking accounting activity using information technology resources. AIS is a structure businesses use to collect, store, manage, process, retrieve and report their financial data so it can be used by accountants, consultants, business analysts, chief financial officers, auditors and tax agencies.

There are five basic components of accounting information systems:

• Computer hardware: Hardware is the physical technology involved with processing and storing data. It can be a smartphone or a supercomputer. Hardware also includes keyboards, external drives and routers.
• Computer software: Software provides the information that tells the hardware what to do. The operating system is the primary system software. Windows and macOS are examples of operating systems. Application software is another type of software. These software programs are designed to handle specific tasks, such as creating a document or managing a spreadsheet.
• Telecommunications: Telecommunications transmits information from your computer hardware and software to others. Connections can be made via wires or wirelessly through a Wi-Fi network. A local area network (LAN) ties computers together in a specific area, such as an office or school. A wide area network (WAN) connects more widely dispersed computers.
• Databases and data warehouses: A database is where your accounting data is stored and where it can be retrieved. A data warehouse contains all the data in whatever form the organization needs.
• Human resources (HR) and procedures: The final component is possibly the most important — the human element. These are the people who run the system. They compile the data and interpret the knowledge in the databases and data warehouse.

6. Tax accounting

Tax accounting focuses on taxes instead of public financial statements. It deals with transactions that impact a business’s tax burden and how those items relate to proper tax calculation and tax document preparation. Tax accounting is governed by the Internal Revenue Code, which must be strictly followed when individuals and companies prepare their tax returns.

Tax accounting is crucial because tax laws are complex and often change. Its primary purpose is determining a company’s tax liability and reporting it to the federal and state governments using the correct tax forms. 

7. Forensic accounting

Forensic accounting combines accounting, auditing and investigative skills to examine the finances of an individual or business. Forensic accountants compile financial evidence and can communicate their findings using reports and presentations in legal proceedings. This type of accounting is often used in fraud and embezzlement cases because it provides a detailed explanation of the nature and extent of a financial crime.

8. Fiduciary accounting

Fiduciary accounting records transactions associated with a trust or estate. It is dealt with on a cash basis. Cash is recorded when received, and disbursements are recorded when paid. This information is then provided to beneficiaries and often the courts.

The rules surrounding fiduciary accounting vary from state to state and even county to county. The decedent’s (a deceased person) or grantor’s wishes must be complied with as expressed in a will or trust document.

A fiduciary sets up an account on behalf of another person who owns the money, known as the principal. Fiduciary accounting provides a comprehensive report of activity within a trust during a specific period, including a record of all receipts and disbursements managed by the trust’s executor or trustee.

The best accounting software

The best accounting software platforms can make things easier for small businesses, accountants and any professional tasked with managing finances. The following platforms will be helpful no matter which type of accounting you use.

• Xero: With Xero, you can manage your bills and expenses from within the same view. You’ll likely find this setup quite helpful for streamlining your cost accounting. Learn about this platform’s other features via our Xero accounting software review.
• QuickBooks: QuickBooks is a great choice for financial accounting. Its reporting suite includes 20 prebuilt reports that cover the fundamentals alongside a plethora of extensively customizable advanced reports. Discover why this platform is so powerful via our QuickBooks Online review.
• FreshBooks: Accrual accounting requires a firm grip on your accounts receivable, and that’s where FreshBooks’s invoicing software comes into play. Year after year of testing accounting software, we’ve found this invoicing interface to be the most user-friendly — the platform substantially expedites your accounts receivable management. Explore what else you get with this platform via our FreshBooks accounting software review.
• Zoho Books: No matter your preferred accounting method, bank reconciliation is a must for keeping accurate, well-organized books. With Zoho Books’ automated reconciliation tools, you’ll streamline this vital function and free up time for higher-value tasks. Check out our Zoho Books accounting software review to learn more.
• Sage 50 Accounting: This platform couples even greater reporting functionality than QuickBooks, with inventory management features that are rare in accounting software. It also includes arrows between accounting tasks to guide your workflows. Read our Sage 50 accounting software review to learn more about this highly advanced platform.

Proper accounting means financial success

You can’t run your business without a transparent view of your financial circumstances. Adhering to one of the accounting methods above guarantees your books will be accurate and clear, enabling you to make better decisions and gauge the financial health of your business. 

Choosing a top accounting software solution can help streamline this process by automating key tasks and sharing important information with other business software you use. Choosing an accounting method and setting up your system the right way will make managing your finances easier in the long run.

Max Freedman contributed to this article.