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Three Types of Accounting and Their Importance for Your Business

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People often consider accounting and finance to be the same thing. However, both are quite distinct from each other. These have not only different meanings but also different purposes. For instance, accounting relates to the methods of how a business acquires its money and how much it spends to facilitate various expenditures.

Finance, on the other hand, entails the procedures of the business as to how it generates the finances and makes business decisions to establish a going concern which means long-term survival and growth of the business.

Nonetheless, both accounting and finance are interdependent. Neither finance nor accounting can derive out results without the necessary input from the other department.

Therefore, it is essential for accounting to get financial expertise as much likely as it is important for finance to obtain accounting records to deliver the desired output.

Considering the accounting aspect, it is a must for any business to use three separate types of accounting so that it can track its sources of income and streams of expenses in the most efficient manner possible. These methods include cost, managerial, and financial accounting. All of these are described in detail below for further assistance: 

Cost Accounting

Many people argue whether the cost and managerial accounting are the same or not. Some believe that there exists no such difference between the two terms as they both serve a similar purpose.

Although these two separate account heads do overlap, there is a fundamental difference which is why these two are not determined to be synonyms. In the case of cost accounting, the prime motive relies on the determination of the production costs of a business.

This procedure takes into account the extent of how much a business incurs in purchasing the supplies and labor to manufacture its final products. These amounts are considered, so managers can compare these costs of production of goods with the revenue and profit earned by the company. This is due to the fact that it helps in developing a budget for future projects of similar nature for the company.  

Managerial Accounting

Managerial accounting is the department of a company that concerns itself with the gathering of financial data of the company. This assists the department in preparing the financial statements of the company for the management and other high-level staff.

The purpose for not sharing with other stakeholders is due to the fact that documents prepared by this department are solely for the purpose of utilization within the organization. This way, the managers use these financial statements to make better business decisions regarding costs as well as the future of the company.

The core aspect of managerial accounting is that the output produced by this department in the form of financial statements and records is used for forecasting purposes. To give you an idea, there are certain specific techniques that are used by Accountants. These include cost-volume-profit analysis, risk management, and variance analysis. 

Finance Accounting

Financial accounting is that part of the accounting department that focuses on external companies. This is to ascertain and determine which companies have expressed interest in the business of the company.

Therefore, several financial statements are prepared by the employees of this department to provide a thorough and fair picture of the company to the investors. These statements encompass balance sheet, profit or loss statement aka income statement, and statement of cash flow statement. There are other documents prepared as well, for instance, value-added statements, changes in equity statements, etc.

These documents assist the investors in comprehending the financial health and position of the company. This way, they can make an in-depth analysis of the future potential of the company and make better decisions regarding investments.

The purpose of financial statements is not only limited to investors. These are often used by the company itself for various purposes. In addition to this, the businesses, including financial institutions and banks, may also look at the financial statements of the company to determine whether they should extend credit to the company or not.

Moreover, it helps in establishing the risk of lending for the company. In case the risk is higher, the lender requests collateral, down payment, guarantee, and/or another method to ensure the repayment of the loan. It is necessary to put down since lenders would want to safeguard their cash. When a company incurs continuous losses over a long period of time, it indicates poor management on the part of the company and lowers its chances of getting credit.

Nonetheless, companies with a strong financial position and outlook often receive the best interest rates along with various favorable terms.

Therefore, it is essential to comprehend the difference between these three accounting heads to derive out optimum results by employing the right information in the right department.

Salman Rundhawa
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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