Most people know that accountants work with numbers, but there's more to accounting than bookkeeping. In this lesson, you'll learn about various accounting disciplines including managerial, financial, tax, government and non-profit accounting.
The American Accounting Association defines accounting as 'the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of the information.' In other words, accounting is about collecting, analyzing and communicating financial information so other people can make decisions. Accounting can be broken down into discrete categories. Let's take a look at some of the most common.
Marvin works as a managerial accountant for a large corporation. A managerial accountant collects, analyzes and communicates financial information to people inside the organization to help them make decisions. Examples of Marvin's work include an analysis of profitability of products or ventures, budgets and development of alternative uses of organizational resources. It's important to note that Marvin's accounting work is not intended for use by people outside his company.
Francine works as a financial accountant for a publicly traded company. Financial accounting involves preparation of financial information for public consumption. In fact, if a company is publicly traded, the law requires that certain financial information be disclosed to ensure that potential investors and shareholders have the information necessary to make informed investment decisions. And governments have a right to see what the company earned to ensure the company is meeting its tax obligations.
Francine will prepare financial documents that are pretty much a reflection of how her company performed in the past. The shareholders and potential investors will often use this information to project, or predict, how the company will perform in the future. Examples of documents that Francine will prepare for public disclosure include the company's balance sheet, income statement and cash flow statement. Francine will prepare the financial disclosures in compliance with the Generally Accepted Accounting Principles (GAAP).
Terry's a tax accountant. Terry focuses on tax issues and planning. Terry works as a consultant and provides tax accounting services to many different companies of varying sizes. He helps them collect the required information for filing of taxes such as income and expenses. He determines allowable deductions and finds available tax credits. He also prepares the tax returns for filing. If the government doesn't agree with the company's return, Terry will assist in representing the company in an audit. But this is only half of Terry's job.
Terry is also involved in tax planning. Terry will help his clients determine the tax implications of proposed business decisions. The goal for Terry is to minimize his client's tax liability within the bounds of tax law.
Gavin works for the federal government as a government accountant. Gavin works for a government agency. His job is to determine the amount of funds needed for his agency's projects so a request can be made during the annual budgeting process. He also helps ensure that his agency is complying with its spending authority granted to it by the legislature.
Gavin uses a system of accounting known as fund accounting. The primary objective of fund accounting is to account for how money is spent rather than how it is earned. Fund accounting involves managing a set of funds. Each fund has a distinct purpose. For example, Gavin's agency may have a personnel fund, a supply fund and an operations fund. Gavin helps ensure that his agency is accountable to citizens by making sure the funds are used for their intended purposes. Gavin must also comply with the accounting standards and principles developed by the Governmental Accounting Standards Board (GASB).
Nancy works as an accountant for a local charitable organization. Nancy's nonprofit organization is not focused on making profits for owners. Instead, it's focused on providing services to its clients. Nancy's organization provides free healthcare to the poor. Just like Gavin, Nancy uses a funds accounting system to track where her organization's money is spent.
Since her nonprofit is a tax-exempt organization, part of Nancy's job is also to help make sure that the organization's financial activities do not result in losing its tax-exempt status. For example, distributing revenue as profit to the members of the organization would cause the organization to lose its tax-exempt status.
Arthur is a certified public accountant and an auditor. There are actually three different types of auditors: internal, external and governmental.
- An internal auditor is an employee of the company being audited.
- Government auditors are employees of a government who perform audits to ensure that organizations are complying with the law.
- External auditors are hired by companies to perform independent audits of the company.
But what the heck is an audit? An audit, in simplest of terms, is a process to verify the accounts and records of an organization. You can break audits down into three basic steps:
- A financial audit seeks to verify that the financial records of the organization are accurate and in accord with GAAP.
- An operational audit is conducted to verify that management is operating the organization in accord with established policies and procedures.
- A compliance audit seeks to confirm that the organization is complying with the laws and regulations to which it is subject.
Let's review what we've learned. Accounting involves the collection, analysis and communication of economic data to consumers of such information. Managerial accountants focus on preparing financial documents for management decision making that is generally circulated only internally. Financial accountants prepare financial statements, such as balance sheets, income statements and cash flow statements, for release to the public. Tax accountants focus their work on tax preparation, filing and tax planning.
Government and nonprofit accountants are focused on ensuring that their organizations are accountable for the funds they use. Internal, external or governmental auditors conduct audits to verify the accuracy of a company's financial, operational or compliance records.
Once you've completed this lesson, you should be able to:
- Define accounting
- Describe the most common categories of accounting
- Identify the three types of auditors and the basic steps of auditing