Types Of Accounting
It’s easy to refer to everything involving numbers in your business as “accounting”, but that can be misleading. To make it simpler to find the help you need, let’s take a look at just a few of the most common terms in the industry.
Accounting vs. Finance
So what is the real difference between accounting and finance? Many people get them confused or see them as one and the same, which isn’t true either. Here is an explanation that may help you differentiate them.
Accounting has the primary duty to record all transactions of the business in a complete and timely manner. It is historical in its function and should include cash and credit transactions as well as changes in what the company owns and owes. This serves as the basis for accurate financial reports including Income Statement (results of operating the business for the stated period of time), Balance Sheet (representing the financial position of the company at a single point in time) and Cash Flow (the sources and uses of cash over the specified period.)
Finance duties emphasize the future. It analyzes data generated by the accounting department to identify trends in the business, project future results of continued operations, and predict outcomes of new products and programs. Common functions under the finance umbrella include forecasting, cost analysis, budgeting, funding, Board of Director presentations, performance metrics, investor relations, and risk assessment.
This is a rough distinction between the duties of the accounting and finance areas. However, in its simplest form finance starts where accounting ends. Both functions are necessary and have distinctive points of view, so neither should be neglected.
Levels of Accounting & Finance Skills:
Full Charge Bookkeeper
A bookkeeper understands the basic dual-entry process and records cash transactions either in manual ledgers or uses self-service accounting software (MS Money, Inuit QuickBooks, PeachTree, etc.) Many of them have been certified in the use of their software products or have completed bookkeeping course work. They can usually generate programmed financial reports but seldom provide interpretation of results.
Because of their limited scope and knowledge, full charge bookkeepers often require the help of an accountant (sometimes the company’s CPA firm) to oversee their work on a monthly or quarterly basis.
Often holding AA or BA degrees from business school or equivalent training, the accountant not only records business activity but can also set-up the books and establish accounting processes for a company. They draw on their education to recognize and record non-cash transactions and are knowledgeable about revenue recognition, asset amortization, and taxation concerns of the business. They can distinguish cash from accrual based accounting and know when each is appropriate. An experienced accountant can often provide reconciliations and reports required by the CPA in preparing tax returns.
This level of staff will usually review the bookkeeper’s entries, record journal entries as needed to make adjustments, record non-cash transactions, or fix mistakes, perform the month-end closing, and produce financial reports.
Management Accounting or Managerial Accounting
Still focused on historical results of the company operation, the Accounting Manager provides all standard financial statements as well as insightful analysis of the data, developing it into useful information for management to use in making decisions about the business. At this level, a CEO can expect to receive cost analysis, profitability comparisons by product or customer type, performance against targets, and other indicators of how the business is doing.
The Accounting Manager aims their reports at internal management, making sure information is timely and relevant to the issues faced in the daily course of running the company. This includes weekly snapshot of results against forecast, key performance indicators and departmental metrics. They should interface with each department to tailor their output to each specific need.
Financial Accounting (Controller and/or CFO)
Financial management is typically performed by a Controller or CFO. At this level, the focus shifts to an audience outside of the company which may include board members, investors, bankers, lenders, regulatory agencies, and strategic partners. The reports are more likely summaries of financial consequences of past activities and emphasize how it will influence the future of the organization. Establishing full understanding of actual results and credible projections based on planned actions is key to garnering support from external sources. Depending on the size of the firm, some mandatory processes (GAAP) may also be required.
The purpose of tax accounting is to create a comprehensive picture of earnings and deductions within a given tax year so that taxes can be calculated properly. In addition to being used in the preparation of tax returns, tax accounting is also used in long-term financial planning with strategies to minimize overall tax impact. If required by investors or regulatory agencies, most CPA firms can also conduct transactional audits.