The accounting world has a language that can be difficult for outsiders to understand. Anyone who has talked about financial accounting, management accounting, cost accounting and equity accounting may be led to imagine that there are several different types of accounting, which implies the existence of several different accounting departments.
The truth is that all accounting is invariably financial. This is because accounting consists precisely of a chain of knowledge and practices for studying and recording a company’s financial transactions.
What is Financial Accounting
The originally known accounting is the one developed by the European school. This is called equity accounting, whose purpose is to present the company’s equity position at a given time. Accounting records are made over a period and, at the end of this period, represent the organization’s balance sheet .
Financial accounting, also called the Anglo-Saxon model, appears as a response to a need imposed by the evolution of business and societies. It is dedicated to serving investors, although it also consists of evaluating the company’s accounting records.
Financial accounting is an administrative and strategic tool for the company, since it serves to provide relevant information to owners, shareholders, managers, investors and potential partners.
Cost accounting and management accounting
Management accounting consists of transforming financial statements into valuable management information capable of feeding the various decision centers within a company.
Cost accounting, in turn, is the result of necessity. This is because traditional accounting generally breaks down production costs, whether industrial or service. This is because production costs contracted for a term go to liabilities, while those contracted in cash are recorded as an expense.
The consequence is that companies, when trying to know their production costs to make decisions, could not count on a tool aimed at offering the total accounting cost of production. Hence the cost accounting that, in a very informal language, records costs in real time, allowing the company to compare production costs with sales.
In summary, financial accounting is de facto accounting, which feeds the various interest groups inside and outside the company with important financial information, which will serve as a central tool or decision aid in various aspects of the business.