These days the common question in the field of financial accounting is “what are the functions of accounting?” Accounting is a vital language for business. It helps the stakeholders to understand the financial information.
Data about business transactions is essential for sharing financial performance. The foundation for effective decision-making is this data. Without a formalised procedure, organisations are unable to get it.
For this reason, businesses document financial transactions. They use the financial accounting concepts. One should also know the features of accounting. Organisations use financial accounting to record and report on transactions. These transactions arise from their daily activities. This article will examine how businesses go deeply into the functions of financial accounting.
What is Financial Accounting?
Financial accounting is a specialized branch of accounting that focuses on analyzing and reporting financial transactions related to businesses. It involves preparing financial reports for public use and encompasses functions such as tracking, recording, and summarizing a company’s financial activities.
These statements help the leaders to make informed decisions. From documenting to reporting transactions, financial accounting takes care of it all.
Objectives of Financial Accounting
There is a simple accounting definition in commerce. The ‘functions of financial accounting’ is to provide regulatory compliance. It also provides general purpose financial statements. It enables outsiders to make informed decisions on the value. The goals of financial accounting are as follows:
- A methodical approach to gathering and documenting an organisation’s commercial transactions. These transactions are provided by features of financial accounting. Because of this, compiling and analysing the transactions becomes simple.
- The basic function of financial accounting is to determine a company’s profitability. Stakeholders and management can make decisions to maintain performance. They can also make the decision to enhance performance. It is done by examining the company’s profit and loss records. These outcomes are favourable and unfavourable and are shown in the financial accounts.
- Information from financial accounting is used by stakeholders. It is done to assess the assets and liabilities of a firm. The reports are directed to shareholders and investors. It entails if their obligations are rising.
It might also indicate if their assets are increasing. A company’s liquidity and solvency statuses are also displayed in financial statements. It basically provides stakeholders with knowledge. This knowledge is basically about the organisation’s capacity to service debt.
Fundamental Items of Financial Accounting
The main aim of financial accounting is to make accurate reports. These reports are the financial statements of a company. The following qualities are must for framework of financial accounting:
- For financial accounting, the information should precisely cover the time that is under review. With that, the end users can make better decisions.
- The information here should be factual and accurate. It must meet the requirements and the financial standards. An organisation usually hires an external auditor to check the authenticity.
- Information from different periods needs to follow a consistent reporting standard. The purpose behind this is to make financial statements reliable. It will let the users compare the financial records from different periods. They will still be able to make the right decisions.
- Financial accounting helps different companies to prepare to report their organisational health using the same standards. It lets the investors and other company owners compare and check the data.
- It basically boils down the complex information to a simple form. Therefore, it is easier for the external entities to understand the report.
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Major Functions of Financial Accounting
Here is an elaboration on the three major functions of financial accounting:
1. Bookkeeping: Recording transactions
Bookkeeping is a methodical recording of the financial activities. It records all the activities of a firm. From payments to sales, it records many entities. An accounting system documents all of it. The debits and credits from the general ledger helps with this process. Proper accounting is a must to stay updated.
2. Making adjusting entries
At the end of each accounting period, there are the adjustments of entries. They do it to ensure the accounts follow the matching. There are many adjustments for the collected income and other factors. You can make sure that the accounts present the finances of a company. But, for that you need to adjust the entries.
3. Preparing financial statements
The accountants can make financial statements. It can be anything like an income statement or others. It should use the transactions that are in the general ledger.
Both the internal and external stakeholders receive such statements. These statements describe the financial position and performance of a company.
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Types of Financial Accounting
The main types of financial accounting basics are elaborated below.
1. Cash basis vs accrual basis
The accrual accounting approach notes the transactions as they happen. It is regardless of when the money exchange takes place. Businesses utilise accrual basis accounting. And they do so to record sales and costs. They record it in their journals even before they collect or make payments.
Only for cash basis accounting the transaction recording is necessary. It is required when the funds exit or enter in the bank account. This approach is extra beneficial for small companies.
It is because the cash accounting of businesses misses the obligations that are not paid. The companies with high inventory levels stay far from using it.
2. Managerial accounting vs financial accounting
There is a primary distinction between management and basic concepts of financial accounting. It is the former aid in decision-making for managers inside the company. The latter gives information to outside parties.
Managerial accounting evaluates financial performance. They use the internal reports. These reports examine operations to try and encourage better decision making. It cannot be used as a foundation for financial statements.
Purpose of Key Financial Statements
The ‘functions of financial accounting’ is to provide an overview of a company’s finances. These statements come with an income statement. They also include a cash flow statement and a balance sheet. It presents crucial information about cash flows and assets.
1. Balance Sheet: Snapshot of assets & liabilities
The balance sheet represents a company’s financial situation. It describes the company’s assets. It contains assets of economic value possessed by the company. These assets can be anything like cash or property.
A balance sheet shows all liabilities and payments to lenders. It gives a clear summary of the assets and liabilities of a company.
2. Income Statement: Company profitability
The income statement summarises a company’s revenue. It also summarizes the costs and net income over a certain period of time. It is usually quarterly or annually.
By matching the revenues with the costs we can calculate the profit or loss. It shows the profitability and success of a company over time. If you analyze the income statements you may find the trends and growth.
3. Cash Flow Statement: Cash inflows & outflows
The cash flow statement shows how much cash a firm generates. It also shows how much they spend within a certain accounting period. It basically categorises the cash flows into financing operations.
It tells where the cash is coming from. Additionally, it says how the cash is being spent. The cash flow statement is useful for many purposes. With other statements, it provides a complete picture of a company’s finance.
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Users of Financial Accounting Information
1. Owners and executives
Owners and executives rely on financial accounting information. They do it to make strategic and operational decisions for the company.
It helps them analyse the company’s performance. Also, it allows them to identify opportunities. With these insights, they plan for the future. They also use financial statements and management accounting reports. The reason behind it is to guide decisions impacting the overall direction and viability of the business.
2. Investors
Investors use financial accounting information. This information can be the public companies’ financial statements.
This information is required to analyse the profitability and future prospects of a company. It helps the company to determine whether to invest or not.
Additionally, it helps them to monitor the performance of their investments. Financial accounting enables transparent data investors to make informed decisions.
3. Lenders
Lenders like banks use functions of financial accounting. They do that to evaluate a company’s ability to repay debt.
Accounting information helps lenders assess creditworthiness. It also assists them with collateral and lending risk. Financial statements help lenders to determine how much they will lend to a company.
4. Regulators
Government regulators depend on financial accounting information. They do it to verify that companies comply with laws and regulations.
Publicly reported accounting data also helps the regulators. It allows them to monitor systemic economic risks.
5. Customers
The major customers may request accounting information. It can be anything like financial statements or others.
It is done to check a company’s stability and viability. This helps them evaluate long-term business relationships.
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Cash Flow Examples and Analysis
The below is an example of cash flow statement.
| Particulars | Value |
| Net income | 487,563.43 |
| Cash from operating activities | 576,948.46 |
| Cash from investing activities | -36,185.13 |
| Cash from financing activities | -38,445.14 |
| Foreign exchange effects | 9,662.67 |
| Net change in cash | 511,980.86 |
| Beginning cash balance | 2,341,041.90 |
| Ending cash balance | 2,341,041.90 |
This illustration demonstrates how a cash flow statement summarises all CCE transactions.
Conclusion
The framework establishes the guidelines for preparing financial statements. It is known as financial accounting. These functions of financial accounting specify many things. However, it especially specifies how an organisation must convert its activities.
It also says how they can convert it into several recognised financial reports. Accounting for finances is essential for holding businesses accountable for their actions. It enables them to be open about how they operate. For every aspiring student, functions of accounting are a must!
FAQs on Functions of Financial Accounting
Q1. What is Financial Accounting?
It is basically a branch of Accounting. The branch specialises in analysing and reporting of financial transactions. These transactions are related to a business.
In this process, a professional might need to prepare financial reports for public use. There are many examples of functions of financial accounting.
Q2. What are the functions of Accounting?
The main functions of Accounting are the systemic tracking and recording. However, there are other important elements. Those are the reporting and summarising a company’s financial transactions.
With the functions of Accounting, companies can keep a fiscal history. It also helps them to make audits.
Q3. Why do owners rely on financial Accounting?
It helps them analyse the company’s performance. Also, it allows them to identify opportunities. With these insights, they plan for the future.
They also use financial statements and management accounting reports. The reason behind it is to guide decisions impacting the overall direction and viability of the business.
Q4. What does a balance sheet represent?
The balance sheet represents a company’s financial situation. It describes the company’s assets. It contains assets of economic value possessed by the company. These assets can be anything like cash or property.
A balance sheet shows all liabilities and payments to lenders. It gives a clear summary of the assets and liabilities of a company.
Q5. What are the steps in the financial accounting process?
The main steps in financial accounting process are:
- Recording the business transactions in the accounting system.
- Making entries at the end of the period.
- Preparing the major financial statements.
- Closing temporary accounts for the accounting period.
- Recording closing entries to start the next period.
Q6. What are the basics of financial accounting?
Financial Accounting deals with the recordings of the transactions. These transactions are a must for preparing the trial balance. They are also essential for the final accounts of the company. The primary function of this is to track the transactions.
The basic function of this is to create financial statements. These statements help the leaders to make informed decisions. From documenting to reporting transactions, Financial Accounting takes care of it all.
Q7. What are the things that are must in Financial Accounting?
Here are the things that are must in financial accounting:
- For financial accounting, the information should precisely cover the time that is under review. With that, the end users can make better decisions.
- The information here should be factual and accurate. It must meet the requirements and the financial standards.
- An organisation usually hires an external auditor to check the authenticity.
- Information from different periods needs to follow a consistent reporting standard. The purpose behind this is to make financial statements reliable. It will let the users compare the financial records from different periods. They will still be able to make the right decisions.
- Financial accounting helps different companies to prepare to report their organisational health using the same standards. It lets the investors and other company owners compare and check the data.
Q8. What is a balance sheet?
The balance sheet represents a company’s financial situation. It describes the company’s assets. It contains assets of economic value possessed by the company. These assets can be anything like cash or property.
Q9. What is a cash flow statement?
The cash flow statement shows how much cash a firm generates. It also shows how much they spend within a certain accounting period. It basically categorises the cash flows into financing operations.
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