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Key Takeaways
- The four major areas in the practice of accountancy are public accounting, commerce and industry, government accounting, and education and research.
- There are several types of accounting where accountants can choose to specialize. More types continue to emerge as technology develops and economic environments change.
- The common types of accounting are: bookkeeping, financial accounting, managerial accounting, auditing, tax accounting, cost accounting, forensic accounting, fund accounting, accounting information system, fiduciary accounting, international accounting, entertainment accounting, and environmental accounting.
The Major Areas in Accounting
Having a fulfilling and lucrative career as an accountant is the dream of most accounting students. After all, this is what motivates them to forgo those tempting college night outs and other fun stuff in exchange for more time to study and prepare for their exams.
After obtaining the highly sought-after accounting degree, many graduates will continue their grueling journey to become a Certified Public Accountant (CPA) or Chartered Accountant (CA), depending on their location. These designations are conferred by a government or other authoritative body to candidates who have fulfilled the required education and work experience, and pass a rigorous licensure examination.
If you’re one of the few who successfully obtains any of these designations, you’ll also be required to undertake continuing professional development trainings to remain competitive, enhance technical knowledge, develop professional skills, and keep pace with changes in accounting standards and practice. You could be barred from practicing your profession if you’re unable to complete these trainings.
Whether you’re on your way to obtaining a degree in accounting or have already passed the licensure examination, you’ll need to decide which among the four areas in accounting practice you want to set your career path. These four major areas are:
- Public Accounting
- Commerce and Industry
- Government Accounting
- Education and Research
To avoid any future regrets in career choices, it’s important that educational institutions help students learn the differences between the four major areas of accounting practice. Students should have a clear understanding about which path they should pursue based on their competency, goals and interests.
Public Accounting
Public accounting is where most licensed accountants practice their profession. Accountants in this area can work as either an individual practitioner or a member of an accounting firm.
Individuals and companies in public accounting renders professional services to multiple clients. The types of accounting under this area are external auditing, taxation, management consultancy, and other services such as business restructuring, insolvency, liquidations, and registrations. We’ll discuss below some of the common types of accounting.
Private Accounting
Private accounting, also referred to as commerce and industry, includes accountants who are employed in private companies as part of their finance and accounting departments. They can serve as the business’ financial accountant, cost accountant, tax advisor, internal auditor, accounting information specialist, controller, and budget officer.
The types of accounting usually related to commerce and industry are financial accounting, management accounting, taxation, and internal auditing.
Government Accounting
Accountants working in local and national government offices play a very important role in the administration of public funds. They use fund accounting to account for the receipt and disposition of government funds and public properties. Accountants should be knowledgeable in the accounting information system being used by government offices.
Government accounting is subject to accounting standards that are different from financial accounting. These standards are established by organizations that are created for that purpose such as the Governmental Accounting Standards Board (GASB) in the United States of America.
The function of government accountants is similar to those in the commerce and industry sector in the manner of analyzing, recording, classifying, and summarizing the financial transactions of a government office as well as budgeting and preparing the necessary reports to be communicated to the public. These reports undergo audit by independent government auditors.
Education and Research
The education and research field is composed of accountants who work in academia. Accountants in this area include researchers, academic professors, licensure exam reviewers, authors, and continuing professional development educators.
Accounting professors and reviewers educate students about the theoretical aspects of accounting. They also help prepare their students for the tough licensure exams. Some educators would become authors of accounting books to impart their knowledge and experience to their readers.
Continuing professional development trainings are required for accountants so they can get updates about changes in their profession and refresh their knowledge in accounting. These trainings are conducted by qualified educators who are knowledgeable and experienced in their respective fields.
Lastly, research is performed by academic researchers and accounting practitioners over a wide range of topics related to accounting. They are responsible for reviewing current accounting standards and practices and revising them to suit the demands of the business world and the current economic environment.
Types of Accounting
If you’re a student or someone who’s considering a career in accounting, you’ll need to be familiar with the different types of accounting. Like many other professions, accounting has several types where practitioners can choose to specialize.
It’s important to determine from the get-go what your career interests and goals are before choosing the area and type of accounting which you could build a career. However, you don’t have to worry about selecting the right path from the start because your interests and career goals could change along the way. In fact, many accountants also specialize in more than one type of accounting.
Financial accounting and auditing are traditionally the most common types of accounting chosen by many accountants as a career. Nowadays, more options are already available to those who want to deviate from the conventional areas of accounting.
As a result of economic, industrial and technological developments throughout the ages, different specialized areas in accounting have emerged. Today, accounting has already extended its arms to management advisory, forensic accounting, accounting information systems, entertainment accounting, and environmental accounting.
Here’s a list of the most common types of accounting:
- Bookkeeping
- Financial Accounting
- Managerial Accounting
- External Auditing
- Internal Auditing
- Tax Accounting
- Cost Accounting
- Forensic Accounting
- Fund Accounting
- Accounting Information System (AIS)
- Fiduciary Accounting
- International Accounting
- Entertainment Accounting
- Environmental Accounting
Bookkeeping
Bookkeeping is the procedural phase of financial accounting that deals with the systematic recording, classifying and summarizing of financial transactions.
Bookkeeping is the preliminary step in the preparation of periodic financial statements and reports. The bookkeeper is usually a person who has knowledge of accounting and whose job is overseen by an accountant.
There’s a common misconception that accounting and bookkeeping are the same. Below are some of the differences between the two.
Difference Between Bookkeeping and Accounting
Bookkeeping |
Accounting |
| Bookkeeping is procedural and is concerned with the “how” of recording business transactions. It does not require any special skills and knowledge for the bookkeeper to do the job as long as they’re well-trained with the accounting policies and procedures of the company. | Accounting is conceptual and is concerned with the “why” or the logic of each items contained in the financial statements. It requires analytical skills and personal judgment on the part of the accountant. |
| The bookkeeper’s scope of work is only within the recordkeeping process and maintenance of accounting records. | Accountants have wider responsibilities that encompass designing the accounting information system, establishing internal controls, generating financial reports, interpreting accounting information, and advising management. |
| The viewpoint of the bookkeeper is in the details of the daily activities of the business. | The viewpoint of the accountant is much broader and at a higher-level since they give advise to management during decision-making. |
| The job of a bookkeeper is overseen by an accountant. The bookkeeper follows the accounting policies and procedures that were established by the accountant. | The accountant supervises and examines the work of the bookkeeper and establishes the policies and procedures to be observed by the bookkeeper in recording transactions. |
| While bookkeepers have a basic understanding of accounting, they are not required to take over the analytical roles of an accountant. | Accountants should know the basics of bookkeeping and its important functions since bookkeeping is an integral part of the whole accounting process. |
Financial Accounting
Financial accounting deals with the preparation of general-purpose financial statements that report the financial performance, financial condition and cash flows of the business for a specified period of time.
Financial statements contain important financial information that is communicated to various stakeholders who use them for decision-making.
Though general-purpose financial statements are primarily intended for use by stakeholders outside the business organization, they are also being used by company managers and executives for purposes such as budgeting, forecasting, planning, and investing.
The financial accounting team consists of bookkeepers and financial accountants. They are headed by a controller or chief accounting officer whose function is to oversee the preparation of financial statements, management reports, budget plans, and other accounting-related activities of the business.
Managerial Accounting
Managerial accounting is involved in the preparation of management reports that are intended exclusively for use by internal decision makers such as managers and department heads.
Managerial accounting is also referred to as management accounting.
While financial accounting focuses on the preparation of general-purpose financial statements that are used by external stakeholders, managerial accounting caters to the needs of internal stakeholders.
Management reports are specially-tailored reports that managers use in planning and managing business operations. These reports are confidential and intended to be used only by decision makers within the business organization. Management reports are issued more frequently than general-purpose financial statements.
Managerial accounting is not subject to regulations or standards that are set by outside parties, unlike in financial accounting where the financial statements must adhere to existing accounting standards and other regulatory requirements. Non-financial information are also included in management reports.
External Auditing
External auditing are services provided by independent audit firms that inspect and analyze the business accounts of their clients and render an independent opinion on the completeness and fairness of the clients' financial statements.
External auditing improves the quality and trustworthiness of the information that’s provided in the financial statements. It also examines the internal control system of the company.
External auditors gather evidence that support and verify a company’s accounting records. They determine whether the financial statements are free of material errors and are prepared in accordance with acceptable accounting standards.
The company’s accountants prepare the financial statements while the external auditor issues an independent opinion on those statements. The work of the auditor begins after the financial accountant has prepared the financial statements.
Internal Auditing
Internal auditing refers to the independent examination of the company’s operations, corporate governance and accounting information systems. It helps by giving value and improving the operations of a business.
Internal auditors compare the results of their review of the organization’s systems and operations with the established objectives and procedures of the company. They help identify issues that involve inefficiencies, noncompliance, theft, and fraud. This is the reason why internal auditors must maintain their independence even if they are employed by the company.
While the focus of external auditors is on financial statements that are issued to users outside the business organization, the internal auditor’s primary focus is working with management in ensuring the efficiency and reliability of systems, operations and governance. The internal auditor’s work may supplement the external auditor’s engagement requirements which could result in reduced costs and time for external audits.
Tax Accounting
Tax accounting is an area of practice where accountants help a business prepare tax returns and plan for their tax payments. These accountants can also represent a business during tax investigations.
If you’re a business owner, not hiring an accountant who is well-versed in tax laws could be detrimental to your business in the long run. Every country or state has different tax laws and it’s important that your tax accountant have an understanding of taxation laws that are applicable to your company.
Tax planning anticipates and determines the tax effects of business transactions and establishes plans to minimize tax liabilities which could result to savings for the company. It also helps you to avoid potential tax-related problems that could lead to penalties, surcharges and interest payments.
Although many tax accountants are employed in various public accounting firms, there are also those who are directly employed in private companies to assist management with tax accounting. Large businesses with adequate resources usually hire their own tax accountants.
Cost Accounting
Cost accounting deals with product costing, pricing and cost control. It assists management in recording and analyzing production and distribution costs particularly in a manufacturing setting.
Cost accounting is considered a part or subset of managerial accounting. It helps managers in efficiently allocating product costs in appropriate areas in the manufacturing process.
Since the beginning of the industrial revolution, cost accounting became more important than ever due to the complexities of large-scale manufacturing processes.
While cost accounting is mostly associated with manufacturing, it’s also equally important to managers who work in service and merchandising businesses.
Forensic Accounting
Forensic accounting specializes in the use of accounting and auditing procedures for legal matters such as fraud investigation, litigation and resolution of disputes in courts.
With the rising frequency of corporate fraud cases and theft, the job of the forensic accountant became more important than ever.
Forensic accounting includes gathering of evidence in cases such as fraud, money laundering, bankruptcies, breach of contracts, and even marital divorce. Forensic accountants are also hired during divorce proceedings to uncover any hidden assets or earnings of any spouse.
Forensic accountants analyze the evidences that they were able to gather and present them in court. This kind of work requires them to have a proper understanding of the law, accounting systems, accounting standards, and any subject that are involved in their investigation.
Fund Accounting
Fund accounting is used by governments and nonprofit organizations to account for their available resources. Instead of focusing on profitability, the emphasis of fund accounting is on accountability.
Both nonprofit and government institutions deploy resources to achieve their objectives. Nonprofit institutions usually raise money from donations, grants and fund-raising activities that serve the purpose of the organization. The government, on the other hand raises money primarily from taxation.
Funds are usually created for general use and specific purposes. Fund accounting measures the inflow and outflow of resources in these funds and groups accounting transactions according to its nature and function in the funds. Setting up a budget for each fund is very important when allocating scarce resources and avoiding any cash shortfalls that would negatively impact their operations.
Accounting Information System (AIS)
As more companies are adopting a computerized accounting information system, AIS specialists have been gaining importance and recognition as they serve as link between information technology and accounting. These specialists are knowledgeable in both accounting and the IT infrastructure of the AIS.
AIS specialists are responsible for the design, development and implementation of an accounting information system that is reliable, efficient and accurate. AIS specialists also include systems auditors and analysts.
Fiduciary Accounting
Fiduciary accounting deals with accounting and reporting of the activities of entities that are under a fiduciary setup such as trusts, estates, conservatorships, or guardianships.
A fiduciary is a person or organization that acts on behalf of their client and is legally bound to act in the latter’s best interests. In this kind of setup, the fiduciary takes care of assets that were entrusted to them by another person for safekeeping and investment.
Fiduciary accounting is necessary in a fiduciary relationship especially when financial reports are required to be submitted by the fiduciary to a court and to any interested parties. It deals with the detailed recording of transactions affecting the fund, protection of the client’s assets and the submission of accounting reports in a court.
Fiduciary accounting helps prevent any potential misappropriation and mishandling of the funds by the fiduciary. The periodic report of the fiduciary should list the principal, distributions, receipts, expenses, gains, losses, and account balances of the assets held in a trust fund or estate.
International Accounting
International accounting deals with accounting issues related to international trade and foreign operations of multinational companies.
Accountants who are involved in international accounting must be knowledgeable of the accounting principles, financial reporting practices and tax laws of different countries where their companies conduct business.
As a response to the need of a common accounting language in a globalized business environment, the international organization of accountants called International Accounting Standards Board (IASB) issued a globally-accepted uniform accounting standards called International Financial Reporting Standards (IFRS). International accounting practitioners use the IFRS when translating statements prepared in different accounting standards so that it can be more understandable to different stakeholders.
Entertainment Accounting
Entertainment accounting refers to the performance of accounting services to individuals and entities that are involved in the entertainment industry.
While most people might think of an accountant’s job as boring and unglamorous, you’d be surprised that there are accountants who work in a niche that’s full of glitz. These accountants work for celebrities, artists, production companies, and any person or business involved in the entertainment industry.
Entertainment accounting includes various services such as financial advisory, personal finance, financial accounting, budgeting, tax planning, estate planning, production accounting, and every area of finance that involves those in the entertainment industry. There are also accountants who are involved in the tallying of votes and announcement of winners for the Academy Awards.
Environmental Accounting
Environmental accounting focuses on the measurement and reporting of business activities that have impact in the environment. It analyzes the costs and benefits of efforts that are related to compliance with environmental regulations and sustainability.
Environmental accounting is already being viewed with increasing importance. It’s a response to the growing concerns about the environmental impact and costs of doing business.
Environmental accounting involves accounting for clean up costs, environmental fines and taxes, waste management costs, investments in environmentally-friendly technologies, lost profits, and negative publicity. This helps the management of a company make better decisions that could result in mitigating damage to the environment as well as increasing company profits.
Review Questions
- What are the differences between accounting and bookkeeping?
- What are the differences between internal auditing and external auditing?
- Why is there a need for international accounting?
- What are the four major areas in accounting practice?
- What are the differences between financial accounting and managerial accounting?
