Flavors of Accounting
Just like ice cream, accounting comes in various flavors. There are so many to choose from, sometimes it is difficult to make up your mind.
In reality though, most of these “flavors” are just plain old vanilla, strawberry, or chocolate. Some are a mix of more than one flavor. Others are more like frozen yoghurt (not real ice cream).
Here we will try to shed light on the main accounting types that may have caused some confusion amongst those non-lingo-savvy business owners out there.
Each of these types has a different focus area and different yet intertwined objectives. The main objective of all accounting services is the same though, to provide decision makers with clarity and control over their business operations at all times.
Many would agree, Tax Accounting is bittersweet. It deals with taxes such as Income Taxes, Sales Taxes, Value Added Taxes (VAT), Withholding Taxes, and so on. The objective is to ensure compliance with the applicable tax laws and local regulations to avoid any fines or penalties that may be imposed due to non-compliance. If done properly, Tax Accounting can save the company money. For instance, proper implementation of VAT regulations can save companies from bearing the cost of input tax and hence reduce the VAT liability on the company.
Cost Accounting is plain old vanilla. It simply records all the direct and indirect costs that the company endures in order to keep track of all the money leaving the company or those who we owe money. Once we know where all the money goes (or is supposed to go), reports can be generated to help management take better decisions.
Project Accounting allows companies to track revenues generated and expenses paid and/or accrued for each project undertaken by the company. The objective is obviously to track profitability of each project individually.
Financial Accounting is a mix of multiple accounting disciplines. The objective is to simply generate the three main financial statements, the Balance Sheet, Income Statement, and Cash Flow Statement. This can be easier said than done. Financial Accounting is governed by complex standards which are frequently updated to ensure more accurate reporting. Depending on where your business is located, and, in case you have branches, where those branches are located, you might find yourself preparing different sets of financial statements with subtle differences due to the different financial accounting standard being followed. For instance, the USA has its Generally Accepted Accounting Principles (GAAP) while Europe and most of the Middle East follow the International Financial Reporting Standard.
Management Accounting is the “make it yourself” flavor of accounting. You can pick and choose what to put in it according to your independent needs. The objective here is to identify, measure, analyze, interpret, and communicate financial information to managers, all in order to be able to get accurate decision making. In this type of accounting, you can identify profitable products and services, generate pricing or marketing strategies, detect inefficient processes and improvement opportunities.
Needless to say, this type of accounting can provide significant insight on a company’s performance, however, sadly, it is typically either not performed in a timely manner, drains resources, or simply overlooked.
When a firm provides accounting services to other companies, it is called a Public Accounting firm – an example of which is our firm, Capital Profits (surprise!). Public Accounting may include financial audits and reviews, outsourced bookkeeping services, financial statement preparation, internal control policies implementation, physical asset and stock counts, analytical reports, tax return preparation, and accounting consultations.
Nowadays, keeping a company’s accounting books in an orderly manner and following all the regulations enforced by the state can be a stressful endeavor for any business. The risks of penalties and fines are high and hiring an accounting team might be unfeasible. Therefore, having a Certified Public Accountant by your side on a retainer basis can help alleviate concerns with regards to non-compliance and allow business owners to do what they do best, run their business.