Private Accounting

Updated on February 23, 2024
Article byJyotsna Suthar
Edited byAlfina
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Private Accounting?

Private Accounting, also called corporate accounting, refers to an accounting practice where private firms employ accountants who maintain and analyze the financial statements. The main goal of this procedure is to employ professionals in the firm that aim to maintain the business’s financial records.

Private Accounting

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The concept of private accounting plays a crucial role in the financial reporting process. It allowed businesses to have an accountant working for a single entity. As a result, the latter helps in the financial and legal procedures. Also, private accounting firms help in determining financial position. However, there can be excessive paperwork involved in this type of accounting. 

Key Takeaways

  • Private accounting, or corporate accounting, is when firms employ an accounts team to prepare financial statements instead of public accounting. 
  • A corporate accounting system has been in existence since the 1800s and 1900s. However, the Baltimore and Ohio Railroad Company was the first firm to hire them in the United States. 
  • Private accountants record business transactions, prepare financial statements, analyze them, and conduct internal audits. 
  • Although there are differences between private and public accounting, they do have some similarities. It includes similar skills, certifications, methods, standards, and more. 

Private Accounting Explained

Private accounting is an accounting type where the recording of financial transactions occurs within a private organization. Unlike public accounting, they cannot work with other firms. Here, private accountants are deemed to work with a single firm rather than a third party. 

Accountants hired under this type must maintain and record financial transactions. Thus, analyze and compile them into proper books and ledger accounts. Also, they help in the financial and legal procedures.

There is a wide range of activities to be performed by private accountants. Let us look at them:

  • Recording Financial Transactions – Accountants and others must record and document every possible transaction that occurs in the business. 
  • Financial and Audit Reporting – As vouchers are recorded in the ledger, accountants must prepare balance sheets and trading accounts. 
  • Budgeting – The financial statements prepared will support the forecast of the cash flows for the firm. Likewise, there can be proper allocation and the best use of the resources. 
  • Internal Auditing – Ultimately, the accountants will perform internal auditing as a part of private accounting. They can also provide suggestions on taxation and legal compliance. 

History

Although accounting originates in 300 BC (before Christ), private accounting positions development dates to the 18th and 19th centuries. As the Industrial Revolution emerged, there were developments in businesses and companies. It became a burden to handle all the financial transactions single-handedly. Thus, in 1887, the American Association of Public Accountants (AAPA) was established. It aimed at developing ethics for audit and accounting standards. 

Later, in 1896, the professional title of CPA was born. Despite the title, even private accountants could have access to it. Likewise, in 1847, the Baltimore and Ohio Railroad Company hired a chief clerk or an accountant. The latter looked after their business transactions and auditing procedures. As a result, the demand for private accounting positions rose in the modern corporate world. 

Examples

Let us look at the examples of private accounting for a better understanding of the concept:

Example #1

Suppose Nexita Pvt Ltd is a firm that works in the textile industry. They have hired accountants who record and maintain business transactions for years. In contrast, its competitor, Silk Textiles, has outsourced their accounting work to a third party. As a result, they are required to disclose their results to the public. 

In the former case, the employees (or private accountants) working do not get the opportunity to travel. In addition, they cannot work simultaneously with another firm as a freelancer. However, they benefit from working regular hours instead of long deadlines. 

Example #2

Let us look at another hypothetical example of Stacy, who works as an accountant in a private firm Yesulin Pvt Enterprises. This firm was started a few years ago to manufacture parts for automobiles and cars. The company has around 100 employees, with 20 in every department. Thus, when Stacy sat down to make the report and financial statements at year end, she had not much hassle. She was able to create the annual report as the firm size was less. At the same time, her friend Kevin worked in a public company. Therefore, he had to deal with higher financial data and regulatory compliance.  

Advantages And Disadvantages

Let us look at the advantages and disadvantages of private accounting to comprehend the concept better:

AdvantagesDisadvantages
It mainly focuses on private firms as compared to public firms.There needs to be constant follow up on private accounting regulations as they are subject to change.
The amount of taxation levels is also low since this accounting considers medium-size enterprises.There is limited exposure to industries as they are restricted to a single firm.
There is a systematic and defined way of preparing financial statements.Limited resources as compared to external accountants.
There is no compulsion to disclose the reports to the public. 

Similarities Between Public And Private Accounting

Although public and private accounting have wide differences, they do have a lot of similarities between them. So, let us look at them: 

  1. Financial Reporting – Both processes involve preparing, recording and forecasting the company’s future cash flows. 
  2. Accounting Standards – They require the accountants to follow Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). 
  3. Taxation And Financial Analysis – It is a common practice for both methods to determine the taxable amount for the respective financial year. Also, they involve financial analysis that can help determine the firm’s financial status. 
  4. Certifications And Courses – The public and private accounting courses prove to be a core element of the resume. As a result, private accounting courses like CPA, CMA, and others are of equal importance to public accountants. 
  5. Guidelines And Ethics – Although both professionals work in different industries and locations, they have the same ethics. Therefore, they need to adhere to the standard rules and regulations. 
  6. Skills – The skills required for both accountants in their respective firms are the same. It includes communication, analytical, expertise, finance knowledge, and others. As a result, one can easily switch from public to private. 

Frequently Asked Questions (FAQs)

1. Do candidates need a CPA for private accounting?

There is no need for private or corporate accountants to have CPA (Certified Public Accountant) certification. However, public accountants must own this degree. The latter cannot qualify for a job if they do not have a CPA. 

2. Is private accounting stressful?

Corporate accounting does have certain pros and cons when debating about stress. Compared to public accounting, it is less stressful. However, there are certain situations when this field might be stressful. For instance, during the end of the financial year, accountants might be required to complete the pending work. Another example includes the level of the hierarchy of professionals. 

3. Are private accounting rules mentioned in the SEC?

Yes, corporate accounting standards are mentioned in federal government laws. These laws are further governed by the SEC (Securities and Exchange Commission). 

4. Is private accounting the same as industry accounting?

Yes, they are interchangeable terms often used in organizations. Both follow the same procedures and methods. However, industry accounting focuses on certain industries like healthcare, textile, automobile, etc. 

This has been a guide to what is Private Accounting. We explain its examples, similarities with public accounting, history, advantages, and disadvantages. You can learn more about financing from the following articles –

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