Understanding the Functions of Accounting

Running a business requires effective management of resources. Finances, human, industry knowledge, and infrastructure are the resources required for running a business. Financial resources are the most important for starting and running a business. Financial and accounting functions play an important role in running a company successfully. Various functions of accounting are used in different stages of the business.

Functions of Accounting

Types of Accounting

Accounting refers to the business process that systematically and comprehensively records business events and transactions and translates them into financial data. The data provided by this function enables business leaders to make informed decisions. The 2 roles of accounting are to provide updated financial data and track all financial transactions. The accounting function is classified into 5 types.

1. Financial accounting:

this type of accounting records the transactions that are needed for the preparation of the trial balance and final accounts. This is one of the main functions of accounting.

2. Cost accounting:

this is the accounting discipline that deals with costs. Costs imply the unit cost of goods and services provided by the organization. The data provided by cost accounting helps the management fix the price of goods/services and control costs and provides relevant information for making strategic buying decisions.

3. Management accounting:

as the name implies, management accounting provides the necessary information for the management to make strategic business decisions. The accounting data provided revolves around funds, costs, profits, and losses. The effect of financial decisions on the business and performance of the entities may be learned with the data provided in management accounting.

4. Tax accounting:

the transactions related to tax and its payment are recorded in tax accounting.

5. Social accounting:

this type of accounting is also referred to as social responsibility accounting. This branch of accounting is a recent development due to the rapid economic and technological improvements that have increased the company’s scale of operations. Social accounting reveals the facilities provided by the entity to the society, like medical, housing, and educational assistance.

What is financial accounting?

As mentioned above, financial accounting is a type of accounting that deals with the recording of transactions that are needed for the preparation of trial balance and final accounts of the company. The primary functions of accounting are to track, report, execute, and predict financial transactions. The basic function of financial accounting is to also prepare financial statements that help company leaders and investors to make informed business decisions. Financial accounting is a type of accounting that includes documenting, summarizing, and reporting transactions that arise from business operations for a period. These transactions are outlined in the preparation of the balance sheet, income statement, and cash flow statement.

The historical function of accounting classifies financial data into income, expense, assets, and liabilities. The main difference between financial and managerial accounting is that the former intends to provide information to parties outside the organization, while the latter provides information for the company’s management to make informed decisions.

Is financial accounting the same as accounting? The accounting function records and monitors all the financial transactions of the business. The accounting department sets policies and procedures for expenses, data management, and the generation of financial reports. Financial accounting on the other hand focuses specifically on generating financial reports based on financial data. There are 4 main types of financial statements that every business needs to prepare.

Income statement:

the company’s net income for a certain period is called the income statement. The total expenses are deducted from the total revenue for the period to reflect in the income statement. The profit and loss statement is the same as the income statement.

Balance sheet:

this financial document shows the assets and liabilities of the company as of a particular date and time. The shareholder’s equity is also reflected in this statement. Assets of a company include cash, prepaid expenses, notes and accounts receivable, machinery and equipment, intangible assets, building and infrastructure, and vehicles. Liabilities can include accounts payable, notes payable, unearned revenue, deferred tax, current taxes, and mortgages.

Cash flow statement:

cash flow statements provide details of the company’s income and debts over a specific period. Only cash transactions are reflected in the cash statement. Only the short-term viability of a company is reflected by the cash flow statement.

Statement of retained earnings:

the amount left after dividends are paid to stockholders.

Principles of Financial Accounting

The functions and objectives of financial accounting are based on a set of principles. Five important accounting principles referred to as generally accepted accounting principles (GAAP) are listed below:

Revenue principle:

all income to the business is recorded when a client or customer accepts goods or services, not necessarily when they pay for it.

Expense recognition principle:

all expenses are recorded when a business confirms goods or services from a third party, not necessarily when they are billed for it.

Matching principle:

each bit of revenue earned should be matched with corresponding expenses. The agency’s expenses for a particular project must be matched with the project costs.

Cost principle:

historical costs of assets and liabilities must be considered, and not current and resell costs. This is referred to as the cost accounting principle.

Objectivity principle:

only factual and verifiable data must be used for financial accounting rather than subjective or estimated figures.

Why is financial accounting important?

With the understanding of financial accounting comes the question of its importance in running a business. The objective of the financial accounting function is to generate statements containing important financial data that provide insights into the financial stability of the business. Financial accounting statements are meant for internal and external circulation. The importance of financial accounting for the business is described below:

Financial accounting is a legal requirement: financial statements like the balance sheet, cash flow statement, and income statement are a legal mandate for companies that are registered. The annual report of the company usually includes these statements.

Representation of financial stability: financial statements are circulated internally with management and externally with investors, auditors, banks, lawyers, and suppliers. The financial stability of the company can be gauged from the data presented by financial statements.

Transparency: by publishing data on accounts and transactions, transparency in disclosing financial performance increases.

Compliance: businesses need to comply with laws and tax regulations, and international financial reporting standards (IFRS).

Data-driven decision making: the reports and statements provided by the financial accounting function empower the management to make data-based business decisions.

Financial accounting is an essential business function that enables professionals to understand their financial inflow and outflow.

Functions of accounting

All companies use accounting to report, track, execute and predict financial transactions. Accounting department functions revolve around storing and analysis of financial information and overseeing monetary transactions. To simply explain the functions of accounting in business, we can say that it creates a fiscal history for any company. The main functions of accounting deal with tracking and reporting information for internal and external uses.

What are the functions of financial accounting? The functions of financial accounting may be classified as Historical or stewardship functions, and managerial functions. Historical accounting functions are communicating financial information, recording financial transactions, finding net results, exhibiting financial affairs, analyzing financial data, summarizing and classifying financial data. Managerial finance accounting functions include control of financial policy, formation of planning, preparation of the budget, cost control, evaluation of employee performance, and prevention of errors and frauds.

Accountants perform various functions of accounting. The three groups of functions performed by accountants may be classified as reporting, analysis, and budgeting. The functions of accounting in a business include the following:

Business costs and revenue:

this is the main function of financial accounting. Tracking business spending with respect to income helps keep a tab of business costs and revenue. Like managing personal finances, accountants record expenses and payments to maintain accurate and updated records of company funds. The main function of bookkeeping is to record what expenses and payments are undertaken by the business.

Accounts receivable:

proper financial accounting ensures that the payments due to the company are received on time. An accountant tracks the business profits regularly to ensure that revenue flow into their bank accounts is not interrupted.

Accounts payable:

accounts payable function focuses on paying the company’s bills. This function ensures that the business completes all the payments due on time and verifies that payments are done only to legitimate requirements. Setting the due date for the payments is also part of the accounts payable function. Clarity on payments helps in the effective management of funds.

Payroll:

the payment of employees’ paycheques is part of the payroll function. The salaries of employees are deducted from the company fund. In addition to paycheques, employee benefits are also paid from the company fund. The accounting function helps decide how employees are compensated for their work based on how their wages affect a company’s profits.

Financial reporting:

storage and calculation of financial data are usually done using digital systems. A publicly owned company is required to prepare and submit quarterly and yearly reports for shareholders containing information on assets, profits, and losses of the business. Private firms also need to prepare financial reports to understand the financial resources of their firm.

Financial analysis:

companies use financial accounting for performance analysis. This analysis is performed by an external or an internal person by considering the entire business operations. Financial analysis helps identify process loopholes and bottlenecks and determine ways to improve process outcomes, by considering financial outcomes of processes. Financial analysis may also suggest changes to employee departments or ways to streamline production processes to reduce wastage.

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Compliance and tax audits:

registered businesses need to comply with tax and compliance regulations. The laws and standards laid down by Internal Revenue Services and Securities and Exchange Commission are to be adhered to by all businesses. Adherence to all the monetary and legal regulations is ensured by the financial accounting function. This function reports the financial working of the company ensures that all local, national, and international compliance regulations are adhered to in all financial transactions.

Fraud prevention:

money mismanagement or wastage is curbed by the financial accounting function. The company’s assets are safeguarded from internal and external fraud by incorporating cybersecurity measures. Accountants need to be aware of ways to ensure the security and safety of digital financial data. They also need to track financial data to ensure that employees are not mismanaging or wasting the company’s resources for personal gain or profit.

Financial budgeting:

setting the company’s financial budget is the responsibility of the accounting function. Preparing the organizational budget is based on financial data from the past and projections for future growth. Accountants are also in charge of preparing department wise budgets and for special projects across the organization.

Determining profitability, liquidity, and solvency:

documents prepared by the financial accounting function provide a clear view of the financial position of the company. The main aim is to ascertain the financial performance and position of the enterprise and convey the information to all the stakeholders.

Various functions of accounting are involved in managing the financial resources of the business optimally. The role of accounting in a business is to enable management with financial data that forms the background for future growth strategies. The data provided by the financial accounting function about the company’s assets, liabilities, cash position, and profits help in making data-driven strategic decisions.

Conclusion

A high degree of accuracy, consistency, and security is required to handle financial and accounting functions. Manual methods of financial accounting cannot provide the accuracy and consistency required in handling sensitive financial data. Automating the functions of accounting helps businesses save time and money and ensures the accuracy of data. Cflow from Cavintek is cloud-workflow automation software that provides quick and effective workflow automation solutions for businesses of varying types and sizes. This solution can be completely customized to meet the unique workflow demands of each company. Leveraging the power of automation for important business processes like accounting and finance improves business outcomes. Sign up for the free demo to see Cflow in action.

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