Although accounting and finance are both vital to the healthy functioning of a business, they have different meanings and accomplish different goals. Accounting, for example, refers to how a business acquires its money and how much it distributes outward to cover expenses. The term finance refers to the way a business makes its financing and business decisions to ensure the ongoing survival and growth of the company.
A finance department can’t operate without input from accounting, and accounting professionals require the assistance of financial experts to create accounting information readily understood by a general audience. A business must use three separate types of accounting to track its income and expenses most efficiently. These include cost, managerial, and financial accounting, each of which we explore below.
Cost Accounting
Disagreement exists within the accounting and finance world about whether cost and managerial accounting are the same or two separate entities. Whatever you’re feeling about it, these two areas of accounting certainly do overlap. The primary function of cost accounting is for a business to determine its production costs by considering how much it spends to purchase the supplies and labor needed to create its products.
When managers receive these figures, they compare the cost of the production of goods against the profit the company earned by selling them. This helps them to establish a budget for future projects of a similar nature.
Managerial Accounting
This area of a company’s accounting department concerns itself with obtaining and preparing financial documents for management and other higher-level staff. The documents prepared by managerial accountants remain within the organization only. Managers use the financial documents they receive from this department to help them make the most appropriate business decisions and manage costs.
A key difference with managerial accounting is that those receiving the documents use it for forecasting purposes rather than as historical evidence of financial progress. Some specific techniques used by this area of accounting include cost-volume-profit analysis, risk management, and variance analysis.
Finance Accounting
Also called financial accounting, this area of a company focuses on external companies that have expressed interest in the business. Employees create several financial statements to provide to investors. The most common ones include the balance sheet, income statement, and statement of cash flows. These documents help investors understand the financial strength of the company to decide whether they want to follow through with making an investment or not.
Businesses considering whether to extend credit to a company also care about its financial statements. This helps them to determine the risk of loaning money to the company. The creditor may request collateral, a down payment, a personal guarantee, or another method of ensuring payment if the business doesn’t have strong financial documents but still shows promise. On the other hand, companies that consistently post a loss or demonstrate proof of poor money management may not have credit extended at all. Companies with the strongest financial documents receive the best interest rates and other favorable terms.
We Offer Many Types of Accounting at Rickhoff & Associates
While these are the most common types of accounting used by small businesses, they aren’t the only ones. At Rickhoff & Associates, we understand every small business has unique accounting needs. Please contact us to learn more about how we can help your business manage its finances well.
FAQs
These types are tax accounting, financial accounting, and management accounting. Management accounting is useful to all types of businesses and tax accounting is required by the IRS. Financial accounting is only relevant to larger companies.
What are the three types of accounting? ›
The three types of accounting include cost, managerial, and financial accounting. Although 3 methods of accounting are both vital to the healthy functioning of a business, they have different meanings and accomplish different goals. Let's dive into each of each below.
What is accounting and why it matters for your business? ›
Accounting helps to track income and expenses so businesses can manage cash flow and stay on top of tax deadlines using skills such as auditing, securing investments and buying assets.
Which of the three types of accounting is most important to small businesses? ›
In summary, financial accounting is vital for small businesses as it provides crucial financial information for decision-making and external reporting, while governmental accounting is less important as it is specific to government entities and not directly applicable to most small businesses.
What are the three major of accounting? ›
The three major areas of accounting are: Cost accounting. Financial accounting. Management accounting.
What are the big 3 in accounting? ›
The Big Three is one of the names given to the three largest strategy consulting firms by revenue: McKinsey, Boston Consulting Group (BCG), and Bain & Company. They are also referred to as MBB. The Big Four consists of the four largest accounting firms by revenue: PwC, Deloitte, EY, and KPMG.
What are the 3 basic accounting statements? ›
The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.
What are three ways accountants help businesses thrive? ›
When companies are experiencing growth or trying to achieve growth, accountants can help by giving business managers insight into cash flow management, inventory management, and business financing.
Why is accounting important for business success? ›
It helps create a backbone of smart decision-making, meeting regulations, and understanding how well the company is doing financially. By keeping track of income, spending, assets, and debts, proper accounting gives a clear view of profitability, cash flow, and financial health.
What is the main purpose of business accounting? ›
The purpose of accounting is to accumulate and report on financial information about the performance, financial position, and cash flows of a business. This information is then used to reach decisions about how to manage the business, or invest in it, or lend money to it.
Accounting helps in decision making, planning, and controlling processes. It's with the help of accounting there will be documents which will be factored in carrying out these processes. Again with these methodical documents, they help in reduction of theft and frauds.
Which type of accounting is most important? ›
Financial accounting is one of the crucial types of accounting that helps a company to make informed financial decisions. A company can attract potential investors and comply with legal rules and regulations with a proper understanding of financial accounting.
What is the 3 meaning of accounting? ›
According to Bierman and Drebin:” Accounting may be defined as identifying, measuring, recording and communicating of financial information.”
What are the 3 basics of accounting? ›
What are the Golden Rules of Accounting?
- Debit what comes in - credit what goes out.
- Credit the giver and Debit the Receiver.
- Credit all income and debit all expenses.
3 Different types of accounts in accounting are Real, Personal and Nominal Account. Real account is then classified in two subcategories – Intangible real account, Tangible real account. Also, three different sub-types of Personal account are Natural, Representative and Artificial.
What are any 3 accounting principles? ›
Accounting principles are guidelines to record accurate financial data, help in financial analysis, and maintain transparency. They include Accrual, Cost, Revenue Recognition, and Objectivity principles, among others.
What are the 3 fundamentals of accounting? ›
Fundamental accounting assumptions are the basic assumptions that accountants use in their work. They are made up of three key concepts: Concern, Consistency, and accrual basis. The fundamental accounting assumptions are the most basic assumptions made by accountants during their work.
What are the 3 different accounts? ›
Types of Accounts – Real, Personal and Nominal Account. Accounting is a process of recording, classifying and summarizing financial transactions in a significant manner and interpreting results thereof. Accounting is both science and art.
What are the three accounting methods? ›
The three types of accounting methods are cash-basis accounting, accrual accounting and modified cash-basis accounting. Cash-basis accounting records income when received and transactions when paid. Accrual accounting records financial transactions even if they're not paid yet.
