Everything You Need to Know About Branches of Accounting in 2021
Accounting is the backbone of any business. The purpose of accounting is to provide accurate and timely financial information, with which businesses can interpret the performance of their business, its cash flow, ascertain the upcoming financial trend and make rational decisions to navigate the business ahead.
Governments and big enterprises have multiple accounting departments dedicated to different branches of accounting. In light of small businesses, either the owner or an accountant keeps tabs on accounting, specializing in one of the branches.
Let us take a closer look at the accounting services for small business and discuss in plain terms about the same.
Contents
Types of Small Business Accounting Services
Types of Small Business Accounting Services
Financial Accounting
Financial accounting is the process of documenting, summarizing and reporting financial transactions of the business on a daily, weekly or monthly basis. This is where every transaction is taken into account, recorded and worked out to prepare financial statements. With these financial statements, one can derive the financial performance of the business for the accounting period.
These financial statements are prepared in line with the accounting principles and formats as guided by their country’s financial and tax legislation. The accounting principles depend upon the reporting requirements of the country where the business is operated.
For instance, businesses in the United States adhere to the regulations and reporting requirements of GAAP - Generally Accepted Accounting Principles, whereas businesses in the United Kingdom go with IFRS, which is International Financial Reporting Standards for small business accounting services.
Accounting Cycle
The process of financial accounting is based on the below mentioned accounting steps. Accounting cycle holds immense importance in terms of understanding the accounting services for small business.
Document financial transactions
Every single transaction that happens for your business is recorded in chronological order in the accounting journal.
Copy to the general ledger
The transactions recorded in the accounting journal are then copied to the company’s general ledger.
Categorize transactions
Then the transactions are classified by account, according to the company’s Chart of Accounts. Your company’s Chart of Accounts may have categories like Revenue, Assets, Expenses, Liabilities and so.
Prepare trial balance
And then you have to prepare a trial balance, in which you will total the net credits and net debits from the general ledger and make sure the total credit equals the total debit. Preparing trial balance is always an integral part of the accounting services for small businesses to maintain transparency.
Adjust entries
Adjust your entries and place the transactions under the accounting period in which they actually occurred. You can adjust your prepaid expenses, depreciation, accrued expenses and accrued revenues to understand how your small business accounting services are performing.
Prepare financial statements
With this information at hand, you can prepare your income statement, balance sheet and cash flow statement.
These tasks can be overwhelming when you are doing manual accounting. But with automated bookkeeping tools like PayTraQer, all your historic and ongoing transactions get into your accounting software automatically in a snap. With such a tool, you get accurate numbers aligned in the right category. You need not scroll through scattered records to organize them.
Financial Statements
Income Statement
An income statement is nothing but a profit and loss statement. This is where you add the income from all the sources, add all your fixed and variable expenses and then subtract your net expenses from your net income. The result that you get is your profit or loss. With this report, you can evaluate the performance of your small business accounting services.
Balance Sheet
A balance sheet needs no introduction when it comes to the description of different accounting services for small business. ideally it has three columns - Assets, Liabilities and Equity. With this information at hand, you can determine the overall financial health of your small business at a point in time.
Cash Flow Statement
The cash flow statement reflects your cash inflows and outflows at a specific point in time. With this statement, you can analyze how your finances flow in your business for a specific period.
Cost Accounting
Cost accounting analyzes the business’ cost structure. This branch of accounting involves classifying, analysing and interpreting the cost of products and services offered. Cost accounting is used when businesses need to evaluate the cost of the products and business activities precisely.
In this branch of accounting, the business costs are recorded, organised, reported and cross-checked for the correctness of cost information. Plus, the main purpose of cost accounting is to verify if the cost rules and principles are applied appropriately.
These are the types of costs measured in cost accounting for for small business accounting services
Material cost - cost of items or inputs to manufacture the product.
Labour cost - wages paid to workers or employees.
Fixed cost - costs that remain unchanged, regardless of the number of items produced or sold (rent, mortgages, payroll, insurance).
Variable cost - cost that changes with the level of input (direct labour or electricity).
Sunk cost - past costs that cannot be recovered.
Opportunity cost - profits that you lose choosing over another course of action.
As a result of analyzing these costs, one can determine the reasons behind the unprofitable products or services that can be stopped or taken care of with implementary steps like combo-ing it with other products or even making some adjustments to the product.
Managerial Accounting
As the name suggests, this accounting method is used by managers and directors to analyze and make daily operational decisions. So, this accounting keenly focuses on any information that is required for a manager or a director to make rational decisions related to the accounting services for small business. However, the management gets this information from the other two branches of accounting.
Managerial accounting primarily deals with processing the company’s historical economic data, using these data to derive set objectives and formulate data-driven rational decisions to achieve those objectives.
Managerial accounting completely focuses on the decision making for the company, rather than the compliance of the record’s format with the tax legislation. Small businesses can adopt this branch of accounting as they start to expand. Managerial accounting measurements are usually kept on-premise as they are highly confidential.
Final Words
Now you get a clear picture of financial, cost and managerial accounting. Each branch of small business accounting services has a different purpose and is used by people at different hierarchical levels in the company. However, there are more branches of accounting such as auditing, tax accounting, fiduciary accounting, international accounting and so much more. You can incorporate these accounting branches when you expand your small business on a larger scale.