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Functions of Accounting

Accounting plays a crucial role in managing and analyzing the financial as well as non-financial information of a company. It helps in measuring the results of the economic activities of a business and makes this information available to the insiders as well as outsiders which include stakeholders, investors, creditors, management, regulators, tax authorities, government, credit rating agencies, etc. Practitioners of accounting are called accountants. Accounting works under the rules and regulations and GAAP and Companies Act, 2013 (applicable only in India).

What are the Functions of Accounting?

Accounting performs so many functions in the favor of an organization such as systematic tracking, storing, recording, analyzing, summarizing, and reporting of the financial transactions that take place in the company. With the help of these functions, the company can easily maintain a fiscal history which is useful for the company during the procedure of auditing. The fiscal history can also be helpful in preparing reports, creating a budget, reducing costs, increasing profits, availing growth opportunities, assessing future expenditure needs, making financial assumptions, providing necessary information to the users of financial statements, etc.

Functions of Accounting

Types of Accounting Functions

The functions of accounting can be classified mainly into five types based on the classification of accounting. They include the followings:

  1. Financial Accounting Functions
    This is one of the most important functions of accounting. Under financial accounting, the company performs the functions which are related to finance and useful in the preparation of its trial balance and final accounts.
  2. Cost Accounting Functions
    Under this accounting, the accountants deal with cost, i.e., the unit cost of the goods and services that are offered by the company. The data collected by performing cost-related functions helps the management in fixing the price and controlling the cost of goods and services. It also provides the necessary information to make strategic buying decisions.
  3. Management Accounting Functions
    Under management accounting, the functions provide necessary information to the management so that it can take strategic business decisions. This information can be related to funds, costs, profit, loss, etc.
  4. Tax Accounting Functions
    In this accounting, the company deals with the functions which are related to tax and its payment.
  5. Social Accounting Functions
    Under social accounting, the company performs the functions which fulfill its responsibility toward society. This is a recent development in accounting that came into the frame after so many economic and technological changes that increased the scale of production. Here, the company offers medical, housing, and educational assistance to society.

Various Accounting Functions

Some of the basic functions that accounting performs in an organization are as follows:

  1. Maintaining Financial Records
    Accounting plays a significant role in maintaining a proper and accurate record of day-to-day business transactions such as supply purchases, product sales, receipts, and payments of various items, etc.
  2. Monitoring Financial Transactions
    Accountants monitor various financial transactions related to payments due to the business to make sure it receives the revenue and earns the required profit.
  3. Making Bill Payments
    Accounting also checks the invoices to make sure that the legitimacy of the charges, setting dates of the payments, and making the payment of the bills that the company owe to the outsiders like vendors, suppliers, etc. Delay in payment of such bills can affect the goodwill of the company and it can be difficult for it to purchase the goods on credit in the future. Accountants keep all these points in mind and ensure the on-time payments.
  4. Keeping Digital Records
    In traditional accounting, data was recorded in the physical form on registers. But with the boom of digitalization, the accounting data is recorded on computers. Accounting involves creating, maintaining, and updating a digital accounting system so that the financial data can be stored and calculated accurately and will survive for a long period.
  5. Preparing Financial Reports
    Accounting has the function of writing detailed and accurate reports related to the company's assets, profits, and losses for various internal and external stakeholders. These reports are prepared on a quarterly or annually basis.
  6. Maintaining Fiscal History of the Company
    As discussed above, accounting helps in maintaining the proper fiscal history of the company's financial transactions by creating, documenting, and storing it so that it can be easily available to the auditors and for the other assessments. It also helps in understanding the profit and loss trend in the business.
  7. Achieving Business Goals
    Accounting plays a crucial role in analyzing financial data to formulate and implement comprehensive financial policies and strategies to advance the business goals of the company.
  8. Preparing Budgets
    Accountants collect all the data related to finance in a company so that they can prepare the overall budget of the organization including the budgets of various departments and projects.
  9. Making Financial Projections
    Accounting helps in analyzing the available financial resources of the enterprise, expected revenues, and business goals so that this information can be used to predict the future growth potential, expansion capability, and performance in the long run of the business.
  10. Auditing Finances
    Accountants work as the financial auditors of the company who identify accounting discrepancies and implement corrective measures for them. This is useful for the effective and efficient utilization of resources including human resources which further increases the production and profit of the business.
  11. Assessing Financial Resources
    The company can conduct a SWOT analysis by using accounting to determine its area of financial strength, weakness, opportunities, and threats. This helps the organization in knowing how to counter weaknesses, how to deal with threats, how to work on opportunities and grab them, and how to boost strengths and implement appropriate strategies.
  12. Reviewing Performances
    Accounting also looks at the regular financial reviews of the various departments of the organization to assess their performance and contribution as well as to make changes so that the waste can be reduced and effective utilization of resources, productivity, and streamlined expenses can be increased.
  13. Complying with Legal Requirements
    Accounting also ensures whether the organization is complying with industry and government rules, regulations, and policies that are related to financial reporting, taxation, and employees' wages or not.
  14. Preventing Mismanagement
    As discussed above, the accounting department is responsible for keeping an accurate and up-to-date record of accounting transactions and other financial works. The accounting helps in ensuring no mismanagement or wastage of money as well as other financial assets of the company.
  15. Ensuring Vigilance Against Fraud
    Accounting is not limited to conducting the paperwork of the company. Apart from this, accounting also helps in implementing strong security measures so that the company's assets can be protected against data breaches and internal and external frauds.
  16. Determining Profitability, Liquidity, and Solvency
    Documents prepared by the accountants give a clear picture of the company's financial position. The main aim behind this is to understand the financial performance of the organization and to share the details with the stakeholders. These details may include the profitability, liquidity, and solvency of the business.

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