What's Internal Accounting? Comparing internal and external accounting

Internal accounting plays an essential role in every business, and its significance cannot be overstated. To gain a better understanding of this vital function, it's important to explore what internal accounting entails and the different types of internal accounting that exist. In the following article, Viindoo will provide an in-depth overview of internal accounting and its various forms.

What is Internal Accounting?

Internal accounting is the process of managing financial information and records within an organization for the purpose of monitoring and controlling its financial performance. It involves the development and implementation of financial policies, procedures, and systems to ensure accurate and timely reporting of financial data.

Definition of  Internal accounting

Definition of  Internal accounting 

Internal accounting is important for businesses as it allows management to track the company's financial performance, identify areas for improvement, and make informed business decisions. The information gathered through internal accounting is used for internal purposes only and is not shared with external parties such as investors or regulatory bodies. 

Types of Internal Accounting

Internal accounting can be categorized into different types depending on the specific aspects it covers. Below are some of the typical types of internal accounting:

  • Cost accounting

Cost accounting is used to identify, measure, and analyze the costs associated with producing goods or services. This type of accounting helps companies understand the profitability of their products or services by tracking and allocating costs to different activities or products. Cost accounting can help companies make informed decisions about pricing, production, and inventory management.

  • Management accounting

Management accounting is focused on providing financial information to management for decision-making purposes. This includes creating budgets, forecasting financial performance, and analyzing financial data to help management make informed business decisions. Management accounting may also include analyzing and reporting on key performance indicators (KPIs) to help monitor the success of different areas of the business.

Types of Internal Accounting

Types of Internal Accounting

  • Financial accounting

Financial accounting involves preparing and reporting financial statements, such as income statements, balance sheets, and cash flow statements. These statements are used to report the financial performance of the organization to external parties such as investors, creditors, and regulatory bodies. Financial accounting is based on generally accepted accounting principles (GAAP) and ensures that financial information is accurate and consistent.

  • Tax accounting

Tax accounting involves preparing and filing tax returns for the organization. Tax accountants ensure that the organization is in compliance with tax laws and regulations and take advantage of tax deductions and credits. Tax accountants may also provide tax planning advice to help minimize the organization's tax liability.

  • Auditing

Auditing involves reviewing and examining financial records to ensure accuracy and compliance with accounting standards and regulations. Auditors may be internal or external and may review financial statements, internal controls, and other financial records to identify potential areas of risk or non-compliance.

  • Forensic accounting

Forensic accounting is used to investigate financial fraud or other financial crimes. Forensic accountants use accounting, auditing, and investigative skills to analyze financial data and identify irregularities or inconsistencies. Forensic accountants may also provide expert testimony in legal proceedings.

Overall, each type of internal accounting serves a different purpose but is crucial in managing and controlling the financial performance of an organization. Understanding the different types of internal accounting can help organizations make informed decisions about their financial strategy and ensure that they are in compliance with relevant regulations and standards.

  See more: 10 easy-to-use accounting management software

The Importance of Internal Accounting

Internal accounting is crucial for any organization as it helps to provide accurate financial information to management, which in turn helps them to make informed decisions that can impact the organization's success. Some of the key importance of internal accounting are:

  • Budgeting: Helps in budgeting and forecasting future expenses and revenues. This allows companies to create realistic budgets and allocate resources accordingly.
  • Performance evaluation: By analyzing financial data, internal accounting provides insights into the company's financial performance, which can be used to evaluate the success of business strategies and identify areas where improvement is needed.
  • Cost control: Provides information on the costs associated with running the business, allowing companies to identify cost-saving opportunities and implement strategies to control expenses.
  • Compliance: Plays a key role in ensuring that a company is compliant with financial regulations and accounting standards. This helps to reduce the risk of penalties, fines, and legal issues.
  • Decision-making: Provides financial data that can be used to make informed decisions, such as whether to invest in new equipment or expand operations. By providing accurate and timely financial information, internal accounting helps management to make the best decisions for the organization.

The Importance of Internal Accounting

The Importance of Internal Accounting

In summary, internal accounting is an essential function of any organization, providing critical financial information that is used for budgeting, performance evaluation, cost control, compliance, and decision-making.

  Read more: Why is Project Accounting critical for Your Business Success?

What is the difference between internal accounting vs external accountants?

Internal accounting refers to the accounting function that is performed by employees within an organization, while external accounting refers to the accounting services provided by an outside party such as a certified public accountant (CPA) or accounting firm. Here are some differences between the two:

Internal accounting​
External accounting
Produces financial reports that are used by management to make business decisions.Produces financial reports that are intended for external sources such as investors, shareholders, and regulatory agencies.
ScopeFocuses on the day-to-day financial operations of the organizationFocuses on providing services such as audits, tax preparation, and consulting to clients
ResponsibilityInternal accountants are responsible for providing the accuracy and completeness of financial dataExternal accountants are responsible for providing independent verification and assurance that financial statements are accurate
Relationship with the organizationInternal accountants are employees of the organization and have a close working relationship with managementExternal accountants are independent contractors who are hired on a project-by-project basis.
QualificationsMay have a bachelor's or master's degree in accounting or a related field.Have a CPA license or other professional certification.

What is the difference between internal accounting vs external accountants?

Comparing internal and external accountants

In summary, the main difference between internal accounting and external accounting is that internal accounting focuses on the day-to-day financial operations of the organization, while external accounting provides services to clients and produces financial reports that are intended for external stakeholders.

Viindoo has provided a useful summary of the definition, types, and significance of internal accounting in businesses. We hope that the article has helped you gain a better understanding of the role of internal accountants in an organization.

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What's Internal Accounting? Comparing internal and external accounting
Viindoo Technology Joint Stock Company, Yen Nguyen 13 April, 2023

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