In business organizations, the functions of accounting are huge. Accounting does everything from recording a transaction to processing it until the necessary information reaches the interested parties.
Therefore, it is clear from this point of view that the accounting function is defined by defining, recording, classifying, and summarizing transactions and presenting them to interested parties, including management.
In addition to this, accounting has many activities that are as follows:
What are the Functions of Accounting?
The top 10 functions of accounting are as follows:
1. Recording of financial transactions:
The primary accounting function is to record the transactions as soon as they occur in the journal. It becomes easier to move them into ledger accounts from the journal.
2. To classify and summarize:
Transactions are separately classified and recorded in the ledger after journalizing the transactions. 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:
The critical function of accounting is to record the transaction in the accounting books and determine an entity’s net results at the end of the period for a specific period.
The business prepares the income statement to determine a business entity’s financial results for a specific date. It is prepared with revenue receipts and expenses specified as ledger balances in the trial balance.
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 prepared to display an organization’s financial status at a given date.
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:
Business organization-related stakeholders, such as owners, employees, suppliers, investors, analysts, governments, etc., remain eager to know different financial details about the organization’s financial positions.
One of the leading accounting functions is to provide them with information regularly through different reports.
6. Analysis of financial data:
Business uses financial data derived from financial statements for interpreting and evaluating various purposes. Such financial data helps define an organization’s ability to repay debts, profit-making capacity, work efficiency, accountability, etc.
Ratio analysis helps to 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. The budget planning:
A significant managerial function of accounting is to plan the budget for revenue and expenditure based on future operations.
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 proper accounts, the business can easily contain errors and deceptions within the organization.
So, one of the significant functions of accounting is to prevent fraud and errors in the organization.
9. Cost Control:
Every business organization’s main objective is to control expenses properly. Keeping them in line with the income, it is possible to achieve the right result only through cost control.
Accounting helps control the 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.
Therefore, it is one of the accounting functions to determine the amount of tax and VAT for an organization by keeping accurate accounts.
You may also read: