Accounting is a set of concepts and methods used to measure and report financial information about a business. Accounting information is used by a large number of people, for example, managers use it to make decisions, owners and investors want to know their return on investment, suppliers are concerned with the ability of the business to make payments, and tax authorities use it to calculate tax liabilities. For this reason there are different types of accounting used to present the information in alternative formats to satisfy the requirements of these different users.
Different Types of Accounting
There are many branches of accounting with the main types being financial accounting and management accounting which includes cost accounting.
What is Financial Accounting?
The term financial accounting relates mainly to the preparation of financial statements for external presentation to third parties such as investors, lenders, suppliers, and tax authorities.
The prime purpose of financial accounting is to report the results of the business for the accounting period. Financial accounts are useful to management but do not provided the detailed accounting information required to allow management to plan and control their business
As the financial statements are normally for use external to the business, in order for them to be understood, they are prepared in accordance with standard guidelines such as the Generally Accepted Accounting Principles (GAAP).
What does GAAP Stand for?
GAAP in accounting is an acronym for Generally Accepted Accounting Principles. GAAP accounting rules are used to regulate accounting and financial reporting in a particular country or territory.
How are GAAP Accounting Rules Established?
GAAP accounting rules are established from many sources but are mainly derived from the following:
- Accounting Standards
- Company legislation
- Statutory requirements
- Securities and Exchange Commission or Stock Exchange requirements
The purpose of Generally Accepted Accounting Principles is to ensure that financial statements issued outside a business are compiled from the underlying accounting information in a consistent and understandable way. This consistency allows third parties such as investors, tax authorities, and bank mangers, to analyze and understand the financial statements and allows comparisons to be made with other businesses.
Our post on Accounting Principles provides additional information on the uses of Generally Accepted Accounting Principles accounting rules.
What is Management Accounting?
The term management accounting or managerial accounting relates mainly to the preparation of financial statements and other accounting information for internal use by the management of the business.
Management are normally involved in planning, controlling and budgeting for the future of the business, and therefore require more detailed financial information than that provided in published financial statements available to the general public.
As the accounting information is normally for use inside the business, the presentation does not have to comply with accounting standards, and can therefore be in a format most suitable for allowing management to control, operate, and make decisions about their business.
Management accounting includes cost accounting which is the application of costing principles, methods and techniques to cost control for the purposes of managerial decision making.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.