Branches Of Accounting

Updated on May 4, 2024
Article byRutan Bhattacharyya
Edited byRutan Bhattacharyya
Reviewed byDheeraj Vaidya, CFA, FRM

What Are The Branches Of Accounting?

The Branches Of Accounting refer to easily distinguishable financial management aspects that process, communicate, and measure non-financial and financial information impacting a business’s associations and economic interests. The majority of organizations utilize accounting branches to gauge the results of the business’s economic activity. 

Branches Of Accounting

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Every branch addresses certain requirements and information within the accounting principles’ framework.  Such branches utilize different techniques to gather and report data to management, creditors, tax collectors, regulatory bodies, and investors. Note that there are different types of branches of accounting. A few examples include financial, international, fiduciary, tax, and managerial accounting.

Key Takeaways

  • Branches of accounting meaning refer to the distinct areas of accounting that offer different insights into economic activities carried out by businesses. These branches help in decision-making and adherence to various rules and regulations. 
  • Cost accounting, auditing, project accounting, and forensic accounting are a few different types of branches of accounting. 
  • Each accounting branch has its use cases. For example, the auditing use cases included fraud detection and risk evaluation. On the other hand, the use cases of managerial accounting include forecasting and budgeting. 

Branches Of Accounting Explained

Branches of accounting define different types of accounting that help in recording as well as sharing business-related transactions with key stakeholders. These branches aim to track and report on a company’s health and economic activity. Some other key objectives of such branches are as follows: 

  • Facilitating decision-making 
  • Complying with regulations and laws 
  • Keeping and maintaining financial assets
  • Monitoring business health via multiple analyses 
  • Determining losses and profits 
  • Safeguarding business assets 

All the accounting branches record business transactions and events. Then, they translate the recorded information into multiple reports for shareholders, managers, or any other key stakeholders. Note that such branches follow specific accounting standards set by different organizations, for example, the Financial Accounting Standards Board (FASB). These standards are the Generally Accepted Accounting Principles (GAAP). Its objective is to foster consistency and uniformity concerning accounting practices while eliminating confusion. 

Types

Let us look at the important branches of accounting in detail. 

#1 – Financial Accounting 

It involves recording as well as clarifying different business transactions with the preparation and presentation of financial statements. These financial statements can advise the organization’s management team regarding acquisitions, investments, loans, etc. This branch follows the GAAP principles to ensure transparency and accuracy concerning the presentation of financial data. Moreover, it puts emphasis on historical data. 

Use Cases 

  • Financial institutions utilize this accounting branch to evaluate the creditworthiness of a business or an individual. 
  • Businesses can utilize it to evaluate their strategies’ effectiveness. Moreover, this branch can help spot the areas of improvement. 
  • Investors rely on this accounting branch to assess an organization’s financial stability, which is key for decision-making. 
  • This branch ensures adherence to regulatory requirements mandated by governments and regulators. 

Example

Suppose Company ZXC is a startup that engages in the manufacturing of electric vehicles. The founder of the company, David, is well-versed in financial accounting. He prepares the business’s financial statements, for example, the income statement, balance sheet, etc., all by himself. These statements show the expenses, profits, and revenue of ZXC, which aids in performance evaluation and stakeholder communication. Moreover, the preparation of such statements every year ensures regulatory compliance.  

#2 – Cost Accounting 

This accounting branch focuses on cost evaluation. It considers all factors associated with manufacturing to figure out a project or venture’s cost. The branch involves analyzing manufacturing costs to create and submit reports that can provide information to an organization’s key decision-makers on how they can minimize costs or when they can spend more. Moreover, it involves tracking projects to ensure cost and waste control. 

Use Cases

  • Companies use it to prepare realistic budgets.
  • Businesses can establish competitive prices by knowing the production cost of every unit using cost accounting
  • It allows for effective cost management, improving sustainability and financial control
  • Businesses can use cost accounting to make well-informed decisions concerning resource allocation, investment, and analyses.

#3 – Auditing 

Auditing involves the systematic inspection and verification of different financial records and processes. It is carried out both externally and internally to ensure that the reporting of financial information is accurate. In other words, it checks whether the business complies with tax regulations and laws and maintains financial integrity. In the case of external auditing, an outside auditor examines financial statements. On the other hand, in the case of internal auditing, a person employed by the organization examines the financial statements.  

Use Cases

  • Auditing evaluates the effectiveness of any business’s internal controls.
  • Businesses can utilize internal auditing to assess financial risks.
  • External auditing detects and prevents financial crimes
  • Auditing provides financial statement assurance to an organization’s stakeholders. 

Example

Suppose the Internal Revenue Service suspected that Company XYZ did not file its tax returns accurately because it showed less income than the amount it reported. Hence, the federal tax agency sent a team of auditors to check the financial records and verify whether the information reported in the tax returns was accurate. The auditing process carried out by the external auditors provided the IRS and the stakeholders of the business with assurance that the income reported in the tax returns was accurate. 

#4 – Fiduciary Accounting 

This type of accounting involves managing all accounts responsible for the custody or handling of property. It monitors and reports disbursements and receipts from the accounts, ensuring proper fund allocations. The branch follows cash basis accounting, which means it involves recording cash at the time of receipt. Generally, estates, trusts, and receiverships utilize this type of accounting. 

Use Cases 

  • Receiverships, trusts, and estates utilize this form of accounting to ensure the maintenance of periodic reports. 
  • Trusts utilize it to safeguard the trustee from any kind of liability in the future. 

Example 

Suppose Adam created a trust fund for his daughter’s higher education. He appointed ABC Bank as the trustee. ABC Bank, the fiduciary, is responsible for managing all assets, such as stocks, real estate, bonds, and other financial instruments. Also, the duties of the bank included tracking and reporting all receipts and disbursements concerning the trust fund Such activities are part of the fiduciary accounting branch of accounting.

#5 – Forensic Accounting

This branch involves handling legal matters associated with fraud, mismanagement, or bankruptcy. It carries out investigations for litigation and court cases, overseas dispute resolutions, and computes damages. Typically, financial institutions, lawyers, insurance providers, and government organizations utilize this accounting branch. This branch plays a key role in detecting fraud or any other form of financial crime. 

Use Cases 

  • This accounting branch provides proof of financial fraud. 
  • Forensic accountants can present information in a specific manner that is able to withstand cross-examination carried out in a court.
  • This branch investigates product liability claims, construction claims, and even patent or trademark infringements

Example 

Suppose the proprietor of ABC firm, Sam, noticed that the purchase of the company increased significantly over the past 2 quarters. He was convinced that some sort of fraud had taken place within the organization as the business had a very low level of inventory. 

So, he hired a team of accountants with expertise in forensic accounting to check all business transactions and events and verify whether fraud occurred. After detailed analysis and investigation, the team concluded that fraud indeed occurred. All 3 members of the accounts team had colluded to prepare fake purchase invoices. They had created a false vendor account and transferred variable amounts every month from the company’s account. 

The forensic accountants provided Sam with all the evidence, and the latter sued the three employees. 

#6 – International Accounting 

With the expansion of international markets, the demand for international accounting is rising. It serves businesses, allowing them to carry out operations in different nations fairly with honesty and integrity. Accountants in this branch do not adhere to GAAP. Instead, it follows globally accepted accounting standards to exhibit a commitment to ethical business practices and effective corporate governance

Use Cases 

  • It allows businesses to convert currencies to any common reporting currency. 
  • International accountants work with tax accountants with the purpose of optimizing tax strategies while considering global tax laws. 
  • Businesses use it for cross-border acquisitions. 

Example 

Suppose DBC Company is a holding company with subsidiaries in more than 10 countries across the world. Its team of international accountants reconciles the different financial statements and carries out currency conversions to prepare consolidated financial reports. These reports provide an accurate reflection of the organization’s financial position and allow the key stakeholders to evaluate DBC’s performance from a global standpoint. 

#7 – Tax Accounting 

It is an accounting branch dealing with tax returns and tax payments and operating distinctly at business and individual levels. The branch reports on the impact taxes have on an organization. Moreover, this important branch of accounting involves offering advisory services concerning tax minimization or the effects of tax decisions. Note that a business structure determines how tax accountants will compute the taxes applicable to the organization. 

Use Cases 

  • Businesses can minimize their tax liability by utilizing this accounting branch. 
  • Tax accounting provides support at the time of tax audits
  • It helps businesses spot and make the most of the available tax benefits
  • Companies can utilize it to navigate through the complexities associated with cross-border transactions. 

Example

Suppose Company ABC Group is a conglomerate operating in different countries worldwide. The organization employs an efficient tax accounting team comprising members who are well-versed in international tax laws. The team members optimize the tax structure of the organization to reduce tax liability ethically. The team of tax accountants is also responsible for computing as well as filing taxes in every jurisdiction where ABC Group carries out operations. 

#8 – Managerial Accounting 

This branch of accounting offers information regarding a business’s internal structure, which is management. Unlike in the case of financial accounting, in this area, accountants track the use of money rather than the amount. Since this branch is exclusively for internal purposes, accountants need not follow GAAP. 

Use Cases 

  • Businesses utilize it for budgeting, which in turn helps in controlling expenses and financial planning.
  • Organizations can use this type of accounting to prepare forecasts based on historical trends and information. 
  • Any organization makes the most of the accounting branch to prepare strategic plans and evaluate the performance of specific departments.  

Example

Suppose Company ABC Company is a company that manufactures and sells t-shirts offline. The company utilizes managerial accounting to evaluate the effectiveness of its different physical stores. Managers of ABC analyze the cost incurred to operate the stores, which allows them to determine the most economically viable shop. Moreover, they can identify the areas requiring improvement. 

Frequently Asked Questions (FAQs)

How is the financial accounting branch of accounting different from other branches?

Unlike other accounting branches, financial accounting focuses on the preparation of financial statements, such as income statements, cash flow statements, and balance sheets for all the key stakeholders of the company, for example, investors, creditors, shareholders, and more.

What is the main difference between branches of accounting and accounting?

Accounting refers to the entire discipline that involves the recording, classification, and analysis of any financial transaction related to businesses. On the other hand, accounting branches refer to distinct, specialized areas that are part of this discipline.

How is managerial accounting different from the branch of cost accounting?

Cost accounting is an accounting branch that only focuses on the costs associated with a business. On the other hand, managerial accounting is a process that involves analyzing every aspect associated with an organization, including costs. Note that cost accounting is management accounting’s subset.

This article has been a guide to what are the Branches Of Accounting. Here, we explain the concept along with their types, use cases, and examples. You may also find some useful articles here –

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