What are Accounting Functions?
Accounting functions are termed as those set of financial systems that help in the bookkeeping of financial information in the organization, financial analysis, summary creation, reporting of transactions and act as the backbone for almost any business. The accounting as a system tries to identify, assess and record the transactions of financial nature in a very systematic approach.
Functions of Accounting
- The accounting helps in the maintenance of bookkeepingBookkeepingBookkeeping is the day to day recording of financial transactions such as purchases, sales, receipts, and payments, and it is the first step in the accounting process. It can be prepared in two ways: single-entry and double-entry; however, the double-entry approach is more widely used and recognized in most countries. and record keeping.
- Accounting helps in the collection and storage of the financial information, transactions happening within the organization, and financial activities happening in the organization.
- It helps in the tracking of several financial informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc. daily or a monthly basis.
- It helps in the creation and documentation of financial history from day to the latest period.
- It helps in the formulation of comprehensive financial policy for the business.
- It is also utilized in the preparation of budgets and financial projectionsFinancial ProjectionsFinancial projection is a statistical forecast of a company's future revenue and expenditure based on historical market patterns, internal factors, data interpretation, anticipated market developments, and experiences. To meet production or sales targets, both short-term and long-term financial estimates are sometimes evaluated..
- It also helps in the reconciliation of information between two sources of financial systems.
- The accounted information can be shared with the external stakeholders with the intent for business planning and growth.
- Accounting does not focus on the activities about the capital budgetingCapital BudgetingCapital budgeting is the planning process for the long-term investment that determines whether the projects are fruitful for the business and will provide the required returns in the future years or not. It is essential because capital expenditure requires a considerable amount of funds..
- It also helps in audit functions and curbs the internal weakness as it makes the systems accountable.
- A business or an organization can prepare and work on several journals to maintain different accounts.
- A comprehensive accounting systemAccounting SystemAccounting systems are used by organizations to record financial information such as income, expenses, and other accounting activities. They serve as a key tool for monitoring and tracking the company's performance and ensuring the smooth operation of the firm. ensures that the accounts of corporates expenses do not get mixed with the personal accounts of vice presidents or managers. Such instances are generally referred to as red flags.
Types of Accounting Functions
#1 – Management Accounting
- This type of accounting observes the performance of a business and identify the opportunities to improve the entity’s financial health. Such a system or function recommends the management with a price that it should set to make the business profitable.
- The management help in the preparation of internal management reports. It looks into trends, expectations on sales, and corresponding costs. It also helps the management in comprehensive workforce planning.
- In short, it could be inferred that it helps the organization to make decisions on the management.
#2 – Financial Accounting
This type of accounting utilizes accounting transactionsAccounting TransactionsAccounting Transactions are business activities which have a direct monetary effect on the finances of a Company. For example, Apple representing nearly $200 billion in cash & cash equivalents in its balance sheet is an accounting transaction. and transforms them into consolidated financial statementsConsolidated Financial StatementsConsolidated Financial Statements are the financial statements of the overall group, which include all three key financial statements – income statement, cash flow statement, and balance sheet – and represent the sum total of its parents and all of its subsidiaries.. These systems also help in historical analysis. The users of the results presented by the financial accountingFinancial AccountingFinancial accounting refers to bookkeeping, i.e., identifying, classifying, summarizing and recording all the financial transactions in the Income Statement, Balance Sheet and Cash Flow Statement. It even includes the analysis of these financial statements. functions can be utilized by creditors and lenders.
#3 – Internal Accounting
Internal accounting monitors and examines the controls and processes implemented within the organization to detect fraud and weakness within the management and teams.
#4 – Taxation Accounting
These account for taxes paid by the business to the revenue authority. This system ensures that the returns on taxes are paid within deadlines. Such systems additionally facilitate the planning of taxesPlanning Of TaxesTax planning is the process of minimizing the tax liability by making the best use of all available deductions, allowances, rebates, thresholds, and so on as permitted by income tax laws and rules imposed by a country's government. It contributes to better cash flow and liquidity management for taxpayers, as well as better retirement plans and investment opportunities..
#5 – Cost Accounting
This function of accounting helps the organization make decisions on the amounts and types of costs it incurs. It segregates and lists down all the components of costs that the business incurs to render service or to produce finished goods.
The knowledge of accounting functions is critical for comprehensive business management. They additionally play a crucial role in daily pursuits of life. It helps in tactful record-keeping of resources of the organization, which in turn ensures compliance in the organization. The lenders and investors only lend and invest in those businesses that have sound accounting practicesAccounting PracticesAccounting practice is a set of procedures and controls used by an entity's accounting department to keep track of accounting records and entries. Other reports are generated based on accounting records, such as financial statements, cash flow statements, fund flow statements, payroll, tax workings, payment and receipts statements, and so on, and they form the basis of the auditor's reliance while auditing the financial statements..
This has been a guide to what is accounting functions and its definition. Here we discuss the types of accounting functions along with purpose and uses. You can learn more about accounting from the following articles –