Accounting is a broad discipline consisting of several subfields or specialised subject areas. Each field of accounting deals with a particular type of financial information, reporting requirement, or business activity. The major fields include financial accounting, management accounting, intercompany accounting, auditing, accounting information systems, tax accounting, forensic accounting, and political campaign accounting.
Financial Accounting
Financial accounting focuses on reporting the financial information of an organisation to external users. These external users include investors, potential investors, and creditors who require financial information to understand the financial position and performance of an organisation.
Financial accounting involves the calculation and recording of business transactions. Based on these recorded transactions, financial statements are prepared for external users. These financial statements are prepared according to Generally Accepted Accounting Principles (GAAP). The use of GAAP helps provide an accepted basis for preparing and presenting financial information.
GAAP develops from a broad agreement between accounting theory and accounting practice. Accounting theory provides the conceptual basis of accounting, while accounting practice represents the actual application of accounting methods. GAAP is not completely static and may change over time to meet the changing information needs of decision-makers.
An important feature of financial accounting is that it mainly produces past-oriented reports. These reports provide information about economic activities and transactions that have already occurred. For example, financial statements may be published six to ten months after the end of an accounting period.
Financial accounting reports are generally prepared on an annual or quarterly basis. These reports normally present financial information relating to the organisation as a whole, rather than concentrating only on a particular product, department, or business unit.
Management Accounting
Management accounting focuses on the measurement, analysis, and reporting of information that assists managers in decision-making. The main objective of management accounting is to provide useful information to managers so that they can make decisions aimed at achieving the goals of the organisation.
Management accounting information is primarily prepared for internal use by management. Internal measures and reports are generally developed on the basis of a cost-benefit analysis. This means that the benefit expected from producing and using information is considered in relation to the cost of obtaining that information.
Unlike financial accounting, management accounting reports are not required to follow Generally Accepted Accounting Principles (GAAP). Since these reports are prepared for internal management purposes, organisations can design the reports according to their specific managerial and operational requirements.
In 2014, the Chartered Institute of Management Accountants (CIMA) developed the Global Management Accounting Principles (GMAPs). These principles were the result of research conducted across 20 countries on five continents. The purpose of GMAPs is to provide guidance regarding best practices in the field of management accounting.
Management accounting may produce past-oriented reports, and the time periods covered by such reports can vary significantly. However, management accounting also includes future-oriented reports, such as budgets. Therefore, management accounting may use both historical information and information relating to future business activities.
Management accounting reports may contain both financial and non-financial information. These reports may also focus on specific areas of an organisation, such as individual products or departments. This is different from financial accounting reports, which generally present information about the organisation as a whole.
Intercompany Accounting
Intercompany accounting focuses on the measurement, analysis, and reporting of information between separate but related business entities. Such entities may include a parent company and its subsidiary companies.
The main purpose of intercompany accounting is to maintain records of transactions occurring between companies that have common ownership. For example, transactions between a parent company and a partially owned or wholly owned subsidiary are recorded under intercompany accounting.
Intercompany transactions may also occur between two companies that have a common parent company. In such a situation, the companies are subsidiaries of the same parent company. When business transactions take place between these subsidiaries, the transactions are recorded as intercompany transactions.
Thus, intercompany accounting specifically deals with accounting information and transactions involving related but legally separate entities.
Auditing
Auditing refers to the verification of assertions made by others. In the context of accounting, auditing is the unbiased examination and evaluation of the financial statements of an organisation.
An audit is a professional service that is systematic and conventional in nature. The auditing process follows an organised approach to examine and evaluate financial information.
The main objective of an audit of financial statements is to express or disclaim an independent opinion on the financial statements. The auditor independently examines the financial statements and provides an opinion regarding their presentation.
The auditor expresses an independent opinion regarding the fairness with which the financial statements present the financial position, results of operations, and cash flows of an entity. This examination considers whether the financial statements have been prepared according to Generally Accepted Accounting Principles (GAAP) and whether they fairly present financial information in all material respects.
An auditor is also required to identify situations where GAAP has not been consistently followed. Therefore, auditing not only involves examining financial statements but also considers the consistent application of recognised accounting principles.
Accounting Information Systems
An Accounting Information System (AIS) is a part of an organisation’s overall information system that is specifically used for processing accounting data. It supports the collection, processing, and management of information required for accounting activities.
Modern organisations increasingly use technology-based information systems. Many corporations use Artificial Intelligence (AI)-based information systems for different business activities. In the banking and finance industry, AI is used for fraud detection. The retail industry uses AI for customer services, while AI is also applied in the cybersecurity industry.
AI-based systems may involve computer hardware and software systems using statistics and modelling. These technologies assist organisations in processing and analysing information.
The use of computer-based accounting software has simplified many accounting practices. Accounting activities that previously required extensive manual processing can be performed more efficiently with the help of software systems.
Large organisations commonly use an Enterprise Resource Planning (ERP) system. An ERP system provides a comprehensive, centralised, and integrated source of information. Organisations can use this information to manage major business processes.
ERP systems can support business activities ranging from purchasing and manufacturing to human resources. By integrating information from different business functions, an ERP system creates a central source of organisational information.
ERP systems may be cloud-based and made available on demand through an application or web browser. Alternatively, ERP software may be installed on specific computers or local servers. Software installed and operated on local systems or servers is commonly referred to as on-premise software.
Tax Accounting
Tax accounting focuses on accounting activities relating to taxation. In the United States, tax accounting primarily concentrates on the preparation, analysis, and presentation of tax payments and tax returns.
The U.S. tax system requires the use of specialised accounting principles for tax purposes. These tax accounting principles may differ from the Generally Accepted Accounting Principles (GAAP) used for financial reporting. Therefore, accounting treatment for tax purposes may not always be the same as accounting treatment used in financial statements.
U.S. tax law recognises three basic forms of business ownership: partnership, corporation, and disregarded entity. Tax accounting considers the tax treatment applicable to these different forms of business ownership.
Corporate income and personal income are taxed at different rates. These tax rates may also vary according to income levels. The taxation system may include marginal tax rates and average tax rates.
A marginal tax rate refers to the rate applied to each additional dollar of income. In contrast, an average tax rate is determined as a percentage of the overall income. Therefore, marginal rates focus on additional income, while average rates consider total income.
Forensic Accounting
Forensic accounting is a specialised practice area of accounting that deals with engagements arising from actual or anticipated disputes or litigation. It applies accounting knowledge and practices in matters that may involve legal proceedings.
The word “forensic” means “suitable for use in a court of law.” Therefore, forensic accountants are expected to perform their work according to a standard that is suitable for legal use and possible presentation before a court.
Forensic accounting assignments are generally conducted with the understanding that the accounting work, findings, or outcome may be connected with a dispute or litigation. Thus, the potential legal use of accounting information is an important feature of forensic accounting.
Political Campaign Accounting
Political campaign accounting deals with the development and implementation of financial systems for political campaign operations. It also involves accounting for financial transactions relating to political campaigns.
The accounting of political campaign transactions must be performed in compliance with the laws governing political campaign operations. Therefore, this branch of accounting combines financial record-keeping with the legal requirements applicable to political campaigns.
Political campaign accounting was first formally introduced in the March 1976 issue of The Journal of Accountancy. It subsequently became recognised as a specialised branch of accounting dealing with the financial activities of political campaigns.
Exam Focus
Financial accounting provides past-oriented financial information to external users and follows GAAP, while management accounting provides information for internal managerial decision-making and is not required to follow GAAP. Management accounting may include both financial and non-financial information and can produce future-oriented reports such as budgets.
Intercompany accounting records transactions between related entities having common ownership. Auditing is the unbiased examination and evaluation of financial statements and aims to provide an independent opinion on their fair presentation.
An Accounting Information System (AIS) processes accounting data, while an ERP system provides a centralised and integrated source of information for managing major business processes. Tax accounting deals with tax payments and tax returns, whereas forensic accounting deals with actual or anticipated disputes and litigation. The term forensic means suitable for use in a court of law.