Accounting is essential for businesses of all sizes. It offers a clear picture of an organization’s financial health, which aids in informed decision-making. However, different types of accounting exist, each designed for specific needs and situations. This article will explore these various types. Understanding them will help you determine which is most suitable for your needs.
1. General accounting or financial accounting
General accounting, also known as financial accounting, involves recording transactions in a detailed and chronological order.
This is the most common form of accounting maintained by law.
Keeping general accounts is mandatory for all businesses, except for micro-businesses which have reduced accounting obligations.
To maintain general or financial accounting, you must periodically produce essential accounting documents such as:
- the income statement: it lists all of the company’s products (revenue) and expenses (expenses) at the end of the financial year;
- the balance sheet: it lists the assets (all economic resources) and liabilities (financial obligations and debts) of a company;
- the accounting appendix: it provides additional and explanatory information on the data presented in the balance sheet, the income statement, and the other financial statements to aid reading.
After the closing of your company’s annual accounting year, the tax authorities may request to audit all mandatory general accounting documents.
2. Analytical accounting or management accounting
Cost accounting is not mandatory, unlike general accounting. It helps to gain a more in-depth view of your company’s financial fundamentals, for example measuring profitability at different scales:
- of a product;
- of a particular activity or a particular project;
- from one of the company’s establishments.
Cost accounting allows you to identify potential sources of optimization and modify your strategy during the financial year. With the help of accounting software, it identifies key performance indicators.
3. Cash accounting
Cash accounting only considers cash inflows and outflows. You must make an accounting entry for all cash receipts and disbursements recorded by your business. The transaction date is the one shown on the business’s bank account.
Some transactions are therefore recorded on a deferred basis. For example, if you sell goods and services and make a sale on November 15, but the customer pays the invoice on December 2, in the cash accounting system, the company records this transaction on December 2, the date on which the money was actually received.
Not all businesses are concerned with cash accounting.
The following are concerned:
- companies subject to the industrial and commercial profits (BIC) regime which have chosen the simplified actual corporate tax regime;
- companies covered by the non-commercial profits (BNC) regime;
- non-profit associations.
If your business meets the eligibility criteria, implementing cash accounting isn’t something you can do overnight. You can hire an accounting professional, preferably a certified public accountant, to ensure your business’s accounts are managed rigorously and professionally.
4. Accrual accounting
Accrual accounting involves recording receivables and payables as soon as the commitment is made, not at the time of payment. This recording method is commonly used. For example, the purchase of supplies will be recorded as soon as the purchase order is signed, rather than when the invoice is paid later.
While it allows for a more precise and global view of the company’s results since it takes into account all commitments at a given time, it also requires regular checks. You must check the company’s account statement and verify that the transactions have taken place.
5. Budget accounting
This type of accounting is optional. It is used to establish a forecast estimate of income and expenditure for the entire coming accounting year.
This is an effective way to compare expected profitability with actual profitability. You can then modify your business strategy if necessary.
Smaller structures rarely use budgetary accounting. It is rather reserved for large companies and large groups.
6. Public Accounting
You are probably not concerned with public accounting because it is that kept by communities and public administrations to take into account expenditure and revenue.
It is based on the same principles as those of the general accounting plan.
Public accounting is used to determine the public budget and then to verify that the expenditure made corresponds to the amount initially planned. It also makes it possible to know whether the community is in budget deficit or surplus.
Summary of the different types of accounting
There are different forms of accounting:
General or financial accounting: mandatory, it records transactions chronologically and exhaustively;
Analytical or management accounting: optional, it provides an in-depth view of financial aspects and measures profitability at different scales;
Cash accounting: it only records the inflows and outflows of real money, taking into account the date of appearance in the bank account;
Accrual accounting: it records receivables and payables as soon as the commitment is made, not just at the time of payment;
Budgetary accounting: not obligatory and used mainly by large companies, it establishes forecasts of income and expenditure for the coming financial year;
Public accounting: it is reserved for communities and public administrations, it is based on the general accounting plan.
To maintain general or financial accounting, you must periodically produce essential accounting documents such as:
The income statement: it is used to list all of the company’s products (revenue) and expenses (expenses) at the end of the financial year;
The balance sheet: lists a company’s assets and liabilities. Assets include all economic resources. Liabilities cover financial obligations and debts;
The accounting appendix: it provides additional and explanatory information on the data presented in the balance sheet, the income statement and the other financial statements to aid reading.
After the closing of your company’s annual accounting year, the tax authorities may request to audit all mandatory general accounting documents.
FAQs
What are the three types of accounting systems?
The Three Types of Accounting for Business Management
- Financial accounting.
- Management accounting (also called cost accounting)
- Tax accounting.
What is the difference between cost accounting and general accounting?
While general accounting is limited to recording and classifying financial flows, cost accounting analyses their consequences and enables decision-making in business management. Cost accounting is the continuation of general accounting.
What are the different branches of accounting?
General accounting, cost accounting, and management accounting are three complementary branches of accounting. They enable businesses to effectively manage their finances, make informed strategic decisions, and improve their performance.