What Are Primary Functions of Accounting?
Accounting is the practice of recording, classifying, and summarizing financial transactions to provide useful information for decision-making and analysis. It is essential for decision-making, cost planning, and measuring economic performance. Professional accountants use Generally Accepted Accounting Principles (GAAP) when preparing financial statements.
Additionally, accounting helps in strategic planning, external compliance, fundraising, and operations management. Accounting is also used to differentiate between managerial accounting and cost accounting. Managerial accounting assists management in making decisions, while cost accounting helps determine the costs associated with products.
For basic accounting needs, a bookkeeper can be used, but larger or more complex tasks should be handled by a Certified Public Accountant (CPA).
Accounting is a complex and highly important field that provides valuable insights for decision-making and analysis. It is a vital tool for businesses of all sizes and can be used to measure economic performance, plan costs, and understand the financial position of the organization. Additionally, accounting is used to differentiate between managerial accounting and cost accounting, and to ensure that financial statements adhere to GAAP. It is also important for external compliance, fundraising, and operations management.
For basic accounting needs, a bookkeeper can be used, but larger or more complex tasks should be handled by a Certified Public Accountant (CPA). A CPA is able to provide more accurate and reliable financial information, ensuring that businesses can make informed decisions. As such, accounting is an invaluable tool for businesses of all sizes and is necessary for optimal performance.
Accounting Cycle
The eight-step process of the accounting cycle is a comprehensive method for recording, analyzing, and reporting a business’s financial activities.
This process typically begins with the preparation of the financial statements and ends with the closing of the accounts.
During the cycle, the bookkeeper or accountant must complete certain tasks in order to ensure that the financial information is accurate and up to date.
These tasks include:
- Recording transactions in the company’s ledgers;
- Analyzing financial data to identify potential areas of improvement;
- Preparing financial statements and reports;
- Reconciling accounts and ensuring that all transactions have been recorded accurately.
The accounting cycle is a critical component of maintaining accurate financial records for any business.
It provides an overview of the company’s financial health and helps identify any areas of concern.
It is also important that the cycle is completed on a regular basis in order for the company to remain compliant with any applicable regulations and standards.
Primary Functions of Accounting
The primary functions of accounting involve the recording of financial transactions.
- The classifying of those transactions.
- The preparation of financial statements.
- The analysis of financial data.
- And the communication of the data to stakeholders.
These functions are essential for any business, as they allow a business to track and measure their performance and financial position.
Furthermore, they are used to inform decisions and to provide financial insight for internal and external stakeholders.
RECORDING
Recording financial transactions is an integral part of accounting, providing an organized system for tracking important data. Bookkeeping is the practice of recording all financial transactions, which include purchases, sales, receivables, payables, receipts, and payments. This is done to ensure accuracy and completeness of accounting records.
With bookkeeping, businesses have a way to keep track of their income and expenses in order to make informed financial decisions. The data collected through bookkeeping can also be used for tax and audit purposes. Accurate and organized records can help a business track its progress and identify areas of improvement. Furthermore, it can help businesses analyze their performance and identify any discrepancies in their financial reports.
Bookkeeping is an important part of the accounting process and should be done regularly to ensure accuracy and compliance with regulatory requirements.
CLASSIFYING
Classifying financial transactions involves categorizing them into assets, liabilities, expenses, and revenues. This is the second primary function of accounting and is important for keeping accurate records. Categorizing transactions ensures that debit and credit rules are applied correctly and helps to create a summary of values from classified accounts in the form of a trial balance.
Classification is also necessary for the preparation of financial statements, which provide a comprehensive picture of a company’s financial health. Classification also enables financial analysis and allows for better decision-making. By classifying transactions, accountants are able to identify trends and patterns that can be used to make better business decisions.
PREPARATION OF FINANCIAL STATEMENTS
Completing the necessary steps to prepare financial statements provides a comprehensive view of an entity’s financial position and performance.
Accounting is responsible for the preparation and presentation of financial statements such as the income statement, balance sheet, statement of cash flow, and statement of change in equity.
Each statement provides a different perspective on the financial health of an entity, such as performance, profitability, operations, and cash flow.
The income statement presents revenue and expenses over a period of time, while the balance sheet summarizes the company’s assets and liabilities at a certain point in time.
The statement of cash flow provides information on cash generated and used by the entity, and the statement of change in equity shows how the equity of the entity has changed over a period of time.
By combining all of these statements, a comprehensive view of the company’s financial health and performance can be achieved.
ANALYSIS OF FINANCIAL DATA
Analyzing financial data is essential for gaining insights into an entity’s financial position and performance. Accountants use various types of analysis to assess and evaluate the financial statements of a company.
This includes ratio analysis, vertical analysis, and horizontal analysis. Ratio analysis helps to determine the liquidity, solvency, and profitability of the company. Vertical analysis is used to compare different items in the financial statements to the total figure, thus allowing the user to identify trends and anomalies. Horizontal analysis is used to compare financial statements from different periods, thus allowing the user to identify changes in the company’s financial performance.
Overall, the analysis of financial data is important to assess the economic conditions of a company and to make informed decisions. It helps to evaluate the financial position of a company, identify potential areas of improvement, and plan for the future.
Additionally, it provides a way to compare the company’s performance with other companies in the same industry.
COMMUNICATION TOOLS
The use of communication tools is essential for conveying financial information to stakeholders of a company. Accounting professionals rely on these tools to accurately and effectively communicate financial information.
This includes the use of reports, dashboards, visualizations, and other formats. Reports provide detailed information about the financial performance of the company, while dashboards provide an easy-to-understand overview of the same information. Visualizations are used to create an intuitive representation of the data, which can be used to quickly analyze and interpret the data.
By using these tools, stakeholders can easily understand the financial information and make decisions based on the data.
BUDGETING
Budgeting is an important aspect of financial planning, requiring the accurate forecasting of future incomes and expenses. It is a primary function of accounting, involving designing, implementing, and operating budgets. The budget includes estimates of future incomes and expenses for a business and is prepared based on historical data from financial statements.
To ensure the budget is effective and accurate, the following steps should be taken:
- Careful consideration should be given to the potential risks and rewards associated with the budgeting process.
- All potential sources of revenue and expenses should be taken into account when preparing the budget.
- Historical data should be used to make informed estimates and assumptions regarding the future.
COST CONTROL
Cost control is a critical step in enhancing financial performance and maximizing profits. It is an important component of the accounting process that follows budgeting.
Cost control involves identifying and reducing business expenses to increase profits. It is an ongoing process that helps in maintaining and growing profitability of the business. It requires accurate tracking of expenses and monitoring of operations to ensure cost-effectiveness.
It is important to monitor expenses regularly and to make sure that there is no overspending or wastage of resources. Cost control is essential in helping organizations to stay competitive and maximize their profits.
TAX
Tax compliance is an important task for organizations, requiring them to adhere to IRS and SECP standards.
This involves ensuring that the company pays the correct amount of income and sales taxes in the relevant tax year.
Accounting staff are responsible for ensuring that the company operates within the bounds of applicable tax laws, as well as preparing and presenting financial data in line with government standards.
Additionally, accounting staff must keep records of all payments and transactions related to taxes to ensure accurate filing of returns.
Furthermore, they must be able to provide evidence of tax payments if required by the government.
Accounting staff must also be aware of any changes in the tax laws and regulations that may affect the company, and adjust their procedures accordingly.
Conclusion
Accounting is an important profession that requires an understanding of financial principles, processes, and practices. It is responsible for tracking, analyzing, and reporting financial information, which is used to make informed decisions and ensure the financial health of an organization.
The accounting cycle consists of four key stages: recording, classifying, summarizing, and reporting. The primary functions of accounting are to record, classify, and summarize financial information in order to produce financial reports and statements.
Additionally, accounting aids in the evaluation of financial performance and assists in the forecasting of future economic activity. Accounting is thus an indispensable tool for businesses and organizations to ensure their financial stability.