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Understanding the Two Types of Accounting
There are two types of accounting, financial accounting and management accounting. Both accounting approaches serve different purposes and support different individuals or groups within an organization. This article discusses the two different types.
Financial accounting is a field that focuses on fulfilling the needs of decision makers outside a company or organization, including credit/equity investors, government agencies, lenders, and consumer groups, among others.
Financial Accounting is regulated by the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and the International Accounting Standards Committee (IASC), all of which issue strict rules to ensure the efficiency of the task at hand, and to ensure that clients’ needs are met.
Financial accounting revolves around the preparation of financial reports. The objectives of financial reporting are to provide information that can help you:
- Make investment and credit decisions (if you have a reasonable understanding of business and economic activities)
- Assess future cash flow
Understand economic resources
When preparing the four primary financial statements — the Balance Sheet, Income Statement, Statement of Retained Earnings, and Statement of Cash Flows — the financial account must take care to avoid bias, ambiguity, and any other factors that provide an inaccurate picture of an enterprise’s financial position.
While financial accounting revolves around the needs of people outside a company or organization, management accounting serves decision makers within a company or organization, such as top executives, senior management, and other high-level administrators.
The goal of management accounting is to identify, measure, and analyze financial information about a specific enterprise. Managers then review the information that has been collected and use it to strategize about future undertakings that could improve the company or organization’s financial success. The chief financial officer, or CFO, is in charge of the entire operation, and thus is responsible for financial organization and planning.