Accounting consists of several important branches or subject areas. Each branch has a specific purpose and provides financial information to different users. The major branches 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 preparing and reporting the financial information of an organization for external users. These users include investors, potential investors, creditors, suppliers, and regulatory authorities.
The main function of financial accounting is to identify, calculate, record, classify, and summarize business transactions. Based on these records, financial statements are prepared according to Generally Accepted Accounting Principles (GAAP).
GAAP is developed through the common understanding and agreement between accounting theory and accounting practice. These principles continue to change over time to meet the changing needs of decision-makers.
Financial accounting mainly provides past-oriented information. It reports the financial performance and financial position of the organization for completed accounting periods. Financial statements are generally prepared annually or quarterly and are often published six to ten months after the end of the accounting period. These reports usually present the financial position of the organization as a whole.
Management Accounting
Management accounting is concerned with the measurement, analysis, and reporting of information that helps managers make effective business decisions and achieve the objectives of the organization.
The reports prepared under management accounting are meant for internal use by management. Unlike financial accounting, management accounting reports are not required to follow Generally Accepted Accounting Principles (GAAP). Instead, these reports are prepared according to the needs of management and are based on cost-benefit analysis.
In 2014, the Chartered Institute of Management Accountants (CIMA) introduced the Global Management Accounting Principles (GMAPs). These principles were developed after research conducted across 20 countries on five continents with the objective of promoting best practices in management accounting.
Management accounting prepares both past-oriented and future-oriented reports. Future-oriented reports include budgets, which help management in planning future activities. Management accounting reports may contain both financial information and non-financial information. These reports may focus on specific products, departments, or business activities rather than the organization as a whole.
Intercompany Accounting
Intercompany accounting deals with the measurement, analysis, and reporting of financial information between related business entities.
This branch of accounting mainly records transactions between companies that have common ownership, such as a parent company and its subsidiary companies.
Intercompany accounting maintains records of transactions that take place between a parent company and its wholly owned or partially owned subsidiaries. It also records transactions carried out between subsidiaries that are owned by the same parent company.
Auditing
Auditing is the process of verifying and examining the financial information prepared by others. In accounting, auditing refers to the independent, unbiased, and systematic examination and evaluation of the financial statements of an organization.
Auditing is considered a professional service that follows established procedures and standards.
The primary objective of a financial statement audit is to express an independent opinion on whether the financial statements present a true and fair view of the organization’s financial position, results of operations, and cash flows in accordance with Generally Accepted Accounting Principles (GAAP).
An auditor may either express an opinion or decline to express an opinion, depending on the circumstances. The auditor is also responsible for identifying situations where GAAP has not been applied consistently.
Accounting Information System (AIS)
An Accounting Information System (AIS) is a part of an organization’s overall information system that is used for processing accounting data.
Modern organizations use computer-based accounting systems to simplify accounting work and improve efficiency. Many organizations also use Artificial Intelligence (AI) in their information systems.
In the banking and finance sector, AI is used for fraud detection. In the retail sector, AI supports customer services, while in the cybersecurity sector, AI helps improve security measures. These systems make use of computer hardware, software, statistics, and modelling techniques.
Large organizations commonly use an Enterprise Resource Planning (ERP) system. An ERP system provides a centralized, integrated, and comprehensive source of information that supports various business processes, including purchasing, manufacturing, and human resource management.
ERP systems may be cloud-based, allowing access through applications or web browsers, or they may be on-premise systems, where the software is installed on local computers or servers within the organization.
Tax Accounting
Tax accounting focuses on the preparation, analysis, and presentation of tax payments and tax returns.
In the United States, tax accounting follows specialized accounting principles for taxation. These principles may differ from the Generally Accepted Accounting Principles (GAAP) used for financial reporting.
The U.S. tax system recognizes three basic forms of business ownership:
- Partnership
- Corporation
- Disregarded Entity
Corporate income and personal income are taxed at different rates. These tax rates vary according to the level of income and include both marginal tax rates, which apply to each additional unit of income, and average tax rates, which are calculated as a percentage of total income.
Forensic Accounting
Forensic accounting is a specialized branch of accounting that deals with matters involving actual or expected disputes and legal proceedings.
The term “forensic” means “suitable for use in a court of law.” Therefore, forensic accountants perform accounting work that can be used as evidence during legal cases and litigation.
Political Campaign Accounting
Political campaign accounting deals with the development and implementation of financial systems for political campaigns.
It also includes the recording and accounting of financial transactions in accordance with the laws governing political campaign activities.
This branch of accounting was first formally introduced in the March 1976 issue of The Journal of Accountancy.