Accounting functions are extremely important in business organizations. Accounting encompasses everything from recording a transaction to processing it until the correct people receive the correct information.
From this point of view, it is clear that the accounting function is defining, recording, classifying, and summarizing transactions and presenting them to interested parties, including management.
In addition to this, accounting has many functions, which are as follows:
Functions of accounting
The following are the top 10 accounting functions:
1. Recording of financial transactions:
The main job of accounting is to write down transactions in the journal as soon as they happen. It becomes easier to move them from the journal into ledger accounts.
2. To classify and summarize:
Transactions are separately classified and recorded in the ledger after journalizing them. These are closed by drawing balances after recording the transactions in the ledger.
Later on, the ledger balance, called the trial balance, is prepared as a brief statement.
3. Find out the financial results:
Accounting’s most important job is to record transactions in the accounting books and figure out what an entity’s net results are at the end of a certain period.
The business makes an income statement to find out how well it did financially on a certain date. It is made based on the expenses and incomes, which are shown in the trial balance as ledger balances.
Therefore, one of the essential functions of accounting is to prepare an income statement.
4. Identify financial status:
One of the significant functions of accounting is the preparation of balance sheets. A balance sheet is made to show how an organization is doing financially at a certain time.
The balance sheet depicts an image of assets and liabilities. The balance sheet can give a clear conception of an entity’s financial stability.
5. Communication of financial information:
Stakeholders in a business organization, like the owners, employees, suppliers, investors, analysts, governments, etc., are still interested in different financial details about the organization.
One of the most important things accountants do is give them information on a regular basis through different reports.
6. Analysis of financial data:
Businesses interpret and evaluate financial data derived from financial statements for a variety of purposes. Such financial data helps define an organization’s ability to repay debts, profit-making capacity, work efficiency, accountability, etc.
Ratio analysis helps identify these results. For example, the current ratio determines the capacity for debt payments.
Therefore, one of the main functions of accounting is the analysis of financial data.
7. Planning the budget:
One of the most important managerial functions of accounting is to plan the budget for income and expenses based on what will happen in the future.
Accounting provides the necessary financial information for the preparation of this budget. Later on, the business compares the budget and actual results, which helps the management with better budget planning.
8. Prevention of frauds and errors:
Every business organization wants to prevent fraud and errors. By keeping accurate records, the business can find mistakes and lies within the organization quickly.
So, one of accounting’s most important jobs is to stop fraud and mistakes in the organization.
9. Cost Control:
Every business organization’s main objective is to control expenses properly. By keeping them in line with the income, it is possible to achieve the right result only through cost control.
Accounting helps control expenses by correctly recording all the organization’s costs in the book of accounts. Therefore, cost control is one of the primary functions of accounting.
10. Determine the amount of tax and VAT:
Every business has to pay regular VAT and income tax. It is necessary to keep proper accounts to determine the exact amount of tax and VAT.
By keeping accurate records, one of the functions of accounting is to figure out how much tax and VAT an organization has to pay.
You may also read:
- What is the Meaning of Accounting?
- What is Bookkeeping in Accounting?
- Bookkeeping vs Accounting
- Top 6 Limitations of Accounting
