Objectives and Functions of Accounting - Functions of Financial Accounting

Accounting Complete Details

To know about the objectives and functions of accounting, it is necessary to know what accounting means. Once you have a fair idea about it, we can discuss the objective and function of accounting in depth.

What is Accounting

The term accounting can be defined as a process of reporting, recording, interpreting, and summarising economic data. The introduction of accounting helps the owners/different stakeholders of a company to make effective choices and decision-making by providing information on the financial status of the business. Accounting is a process through which one can easily handle, record, summarize, report, and analyze financial transactions. Accounting plays a vital role in the sustainability of businesses. Understanding the objectives and functions of financial accounting is crucial. Let's explore the objectives of accounting and the main functions of accounting step by step.

What are the Functions of Accounting?

Accounting functions encompass financial systems that manage, analyze, and report transactions crucial for businesses. There are six essential functions of financial accounting which include the systematic recording of data, tracking, storing, analyzing, summarizing, and reporting an entity’s financial transactions. Through the functions of accounting department, the entity can maintain a history of financial data which is also utilized for audit of the financial statements.

The entity can also use it for preparing reports, creating budgets, maintaining cost data, planning for increased profits or reducing costs, avail growth opportunities, maintaining statutory records and their compliances, assessing future expenditure requirements and making financial projections, and communicating necessary information to the users of financial statements, etc. The basic functions of accounting in an entity may include the following:

• To Keep Financial Records

Accounting helps businesses in maintaining an accurate and up-to-date record of the day-to-day financial transactions of the entity, such as purchases, product sales, receipts, and payments.

•  To Monitor Financial Transactions

Accountants may track and record multiple financial transactions which are relating to payments due to the company and receipts earned by the company to ensure it receives the revenue and remains profitable.

• To Prepare Financial Reports

In the growth of any business, the accountant or other person authorized on this behalf may need to prepare different types of financial reports. Which can be done after its complete accounting. Accounting involves preparing detailed Monthly, quarterly, and annual financial reports about the company's assets, debts owed, profits and losses for internal and external stakeholders and for statutory compliances, etc.

• For Payments of Employees Due

The entity can use accounting to make payroll payments every month, manage employee benefits and issue employee work-related bonuses or performance bonuses. Accounting also helps to maintain a clear record of employee welfare fund, statutory PF, employee provident fund, etc.

• To Maintain Digital Records

Accounting may involve creating, maintaining, and updating digital accounting systems which can be stored digitally for maintaining the company's financial data.

• To Make Bill Payments

The functions of accounting also involve checking invoices to ensure that bills are properly expensed off and setting dates for payments and paying the bills that the company owes to various vendors and suppliers on a particular date.

• To Prepare Forecasts/Budgets

The accounts department may need to prepare forecasts/ budgets of the entity’s financial data to check the future profitability of the company. These forecasts/ budgets can be the overall company budget, the departmental/internal budgets, and the project budgets.

• To Make Financial Projections

Functions of accounting involve preparing financial projections by analyzing the company's available financial resources, expected revenues, future expenses, etc. using this information entity can predict project viability, future business expansion, and growth.

• To Make Available Records for Auditing

It is the responsibility of an Accountant to make available all the related financial records from which the auditor of the company can conduct financial audits of the company, identify accounting discrepancies and provide corrective solutions.

• To Keep Financial Resources up-to-date

The functions of accounting can also be used in checking the financial weaknesses and strengths of the organization, providing solutions and strategies to concur the weaknesses and improve strength.

• For a Review of Performances

Accounting also involves performing regular financial reviews and fixing some performance evaluation criteria for each of the company's different departments to check their performance and give rewards to one which fulfills the performance evaluation criteria, it motivates them which is result into the increase their productivity and streamline the expenses.

• To Comply with Legal & Statutory Requirements

The department of accounting functions make sure the entity is complying with all the statutory and legal compliances that apply to the entity also checks all industrial and government rules applicable to the entity, regulations, and policies related to taxation, financial reporting, and employee wages related compliances to save the entity from any penalties for non-compliance.

What Are the Objectives of Accounting?

The objectives of accounting are integral to every business entity, as they contribute to realizing and achieving the overall goals of the organization. The following are the major objectives of accounting:

• To Keep a Systematic Record of All Business Transactions

Accounting is used to maintain a systematic record of all the financial transactions in the books of accounts of an entity and that is one of the main accounting objectives. For this purpose, all transactions have recorded the books of accounts in chronological order in Journal and then posted to different ledger accounts.

• To Ascertain Profit and Loss & Ascertainment of Results

Every business starts with the motive to earn profits. We can say that profits are the backbone of any business. Also, the users of financial statements are very keen to know the net results of business operations periodically. To check whether the business is earning profits or making losses, we prepare a statement or account called “Profit &  Loss Account or Statement of Profits & Losses”.

• To Determine the Financial Position of an Entity

By accounting for each and every asset owned by an entity and liabilities incurred by the entity, we can get to know the exact financial position of our business at a particular date. In this regard, we prepare a “Balance Sheet” to check the value of assets and liabilities.

• To Provide Information to Various Users of Financial Statement

Users of financial statements play a major role in the company. The financial statements of an entity can affect the decision-making process of the user of the financial statement. They also participate in future business growth. Providing information to the various interested parties or stakeholders is one of the most important objectives of accounting, it helps them in making good financial decisions.

• To Assist the Management

By analyzing the financial data of an entity and providing interpretations in the form of reports, accounting can also assist management in handling the daily business operations in an effective manner.

Two Functions of Accounting

Additionally, to explain the functions of accounting, it can be further subdivided into 2 categories. 

Historical Functions

Historical function in accounting means keeping the accurate past transactional record of the business. To conduct this function, the Accounts department needs to follow the below steps:

1. Recording and managing journal of all monetary transactions
2. Posting of all transactions in appropriate ledger accounts
3. Classifying the records in different ledgers
4. Summarizing for hassle-free reviews
5. Finalizing of accounts to know the financial position of the business
6. Communicating financial information to the prospective sectors such as shareholders, researchers, government, suppliers, etc.

Managerial Functions

In a business, it is the responsibility of the finance managers to take decisions. So, to make smooth decisions and to ensure accurate results they analyze the records of previous reports. Here are the six accounting managerial functions:

1. Forming Plans
2. Controlling financial policies
3. Preparation of budget to obtain an approximate value of future expenditure.
4. Controlling the cost by comparing cost and work efficiency
5. Evaluating the performance of employees
6. Analyzing errors and mistakes in the past record to make accurate reports

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