Contributor

Updated: May 11, 2023, 6:51am

Tax accounting is the most popular type of accounting. Tax accountants help individuals, businesses and nonprofit organizations comply with the Internal Revenue Code. They also help their clients develop tax strategies to reduce their taxes as much as legally possible.

It’s probably safe to say that everyone from sole proprietors to large corporations could benefit from hiring a good tax accountant. In fact, the larger the business, the more of a necessity it becomes. After all, tax accounting mistakes can cost you a lot of money and get you in trouble with the IRS, which can have serious legal consequences. That’s why it’s best to let professionals handle your taxes.

Financial accountants help businesses track, record and categorize financial transactions. They typically follow the standard eight-step accounting cycle:

• Identifying financial transactions
• Preparing journal entries
• Posting journal entries to the general ledger
• Calculating the unadjusted trial balance
• Posting adjusting journal entries to the general ledger
• Calculating the adjusted trial balance
• Preparing financial statements
• Posting closing journal entries to close the books

There are three main types of financial statements:

1. Income statement: Summarizes the company’s revenue and expenses over the accounting period.
2. Cash flow statement: Summarizes the company’s cash inflows and outflows over the accounting period.
3. Balance sheet: Summarizes what the company owns and what it owes at the end of the accounting period.

These financial statements are meant for external use. Businesses show them to their lenders, creditors and investors. Because of that, financial accountants have to ensure that income statements, cash flow statements and balance sheets comply with the Generally Accepted Accounting Principles (GAAP) standards.

And if the company in question is public, its financial statements must also comply with the Securities and Exchange Commission (SEC) regulations.

As with tax accounting, financial accounting mistakes can cost you a lot of money and get you in legal trouble.

That’s why it makes sense to hire a good financial accountant to track, record and report financial transactions and create financial statements for your company.

Note that financial accountants typically only deal with historical data. They don’t extrapolate from the past into the future as managerial accountants do.

Managerial accountants, also known as management accountants, collect financial data, analyze it, compile it into reports and then present it to the company’s management. Unlike the previously mentioned financial statements, these reports are intended for internal use only and aren’t governed by external regulations.

The purpose of these documents is to provide those in leadership positions with the information they need to make better business decisions.

Managerial accountants also analyze financial records to make predictions in various contexts such as operations, logistics and risk. The larger and more complex the business, the more likely it is to benefit from hiring a good managerial accountant.

Cost accounting is a type of management accounting focusing on the cost structure of a business. The three key elements of cost accounting are:

Direct and Indirect Materials

Direct materials are materials used in the finished products—for example, ingredients in a restaurant’s dishes.

Indirect materials are materials utilized in production but can’t be connected to a specific finished product. Say, cooking utensils are used to prepare dishes, but they can’t be linked to any particular dish served to the customers.

Direct Labor

Direct labor is costs associated with producing a product or delivering a service. For example, in restaurants, the wages of cooks preparing the dishes and the waiting staff serving those dishes are considered direct labor.

Overhead

Overhead costs are ongoing business expenses not directly attributed to creating products or delivering services. Rent, utilities, office staff wages, maintenance staff wages, supplies, equipment repairs, taxes, etc., are all considered overhead costs.

Cost accountants track the company’s spending across these three areas and create internal reports that break it down. These documents are used to develop budgets, identify opportunities for cutting costs and monitor the overall financial situation of the company.

While a decrease in cost efficiency is probably unavoidable as your business grows, cost accounting can help you counteract it. Hiring a good cost accountant might prove to be a significant investment!

Forensic accountants investigate the finances of individuals and organizations for potential criminal activity such as fraud, embezzlement, hiding assets and so on. The two key aspects of forensic accounting are:

• Investigation. Forensic accountants go over the relevant documents looking for evidence of financial wrongdoing.
• Litigation support. Forensic accountants compile their findings into reports that can be presented to the court and then testify in court if needed.

Typically, forensic accountants specialize in one of these four areas:

• Fraud and financial investigations
• Family law
• Business valuation
• Economic damages

As a business owner, it might be wise to consult a forensic accountant if you suspect that there might be some criminal activity going on in your company. Also, even if you don’t have such suspicions, bringing in a forensic accountant to review the company’s finances might still make sense because it’s good to regularly get an independent third-party perspective on your financial situation.

Government accountants are responsible for budgeting, managing and tracking the government’s finances. They need to follow the standards set by the Governmental Accounting Standards Board (GASB).

It requires a skill set different from all other types of accounting because the government has unique needs that are unlike those of organizations in the private sector.

International accountants help companies navigate regional, national and local laws and regulations. They must adhere to the International Financial Reporting Standards (IFRS), developed by the International Accounting Standards Board (IASB).

While it isn’t relevant for businesses that only operate in one country, international accounting is a necessity for companies that want to expand globally. It’s prudent to hire an international accountant if you intend to enter a foreign market because failure to comply with its laws might get you into legal trouble.

It’s debatable whether auditing should be considered one of the types of accounting. Why? Because you can do auditing in the context of tax, financial, management, forensic and international accounting.

However, it plays such an important role in the accounting world that we decided it would be unfair not to include it in this list. Auditing can be divided into two categories:

1. Internal Auditing

Internal auditing is when the company’s finances are audited by accountants who work for that company. It’s typically done by tax, financial or managerial accountants, depending on the audit’s purpose.

Financial accounting is probably the most common context for internal audits. In some cases, if the company’s leadership suspects financial wrongdoing, they might bring in a forensic accountant for an internal audit. We recommend regular internal audits to ensure your company’s finances are in order.

2. External Auditing

External auditing is when the company’s finances are audited by accountants who work for a third party.

It’s most commonly done by financial accountants to ensure that the company’s financial statements comply with the Generally Accepted Accounting Principles (GAAP) standards. Tax accountants might audit your business if the IRS notices tax incongruences, or forensic accountants if law enforcement agencies suspect financial wrongdoing.

Bottom Line

Business owners need to be familiar with various accounting types to know what accountant they should hire in any given situation. Be aware that just because someone is an accountant doesn’t mean that they are a good fit for the accounting task that you have in mind. It’s important to find someone who specializes in the type of accounting that you need.

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