What Are the Major Functions of Accounting?

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Finances rest at the core of building any business venture. Without adequate financial management, businesses cannot secure resources, pay taxes, execute projects and even begin operations. As a precautionary measure, businesses quickly institute finance departments or professionals as a permanent part of their organization. In addition, keeping a constant eye on the flow of finances to and from your organization keeps you, as a business owner, aware of whether your business is performing successfully. While not the only indicator of good business practices, watching revenue rise, minimizing unnecessary expenditure, and keeping activities transparent keeps stakeholders motivated. Accounting is standard practice to keep track of all financial-related information. Employed by most, if not all, organizations, accounting offers keen insight and understanding of a business’s financial situation. 

What Are the Major Functions of Accounting?

Accounting 101

  • Accounting covers managing, organizing, and comprehending financial records and statements. 
  • An accountant processes basic financial information such as transactions, taxes, projections, and invoices to produce understandable information for all stakeholders
  • This information helps understand the status of assets and liabilities, cash flows, and profitability. Additionally, picking out financially draining activities is easier when flows can be simplified and mapped. 
  • The accounting cycle begins when a business transaction begins. The company’s ledger keeps track of all activities. Following are the six steps in the accounting cycle:
  1. Analyzing and recording all transactions, including invoices and bank statements
  2. Entering the transactions into the ledger under the rules of double-entry accounting
  3. Preparation of an adjusted trial balance
  4. Creating a trial balance that consists of all business accounts and their balances
  5. Preparation of adjusting entries after the period of entry
  6. Preparation of financial statements
  • These activities can be conducted manually by finance departments or professionals. With the versatility of software today, accounting software is additionally employed to maintain accuracy and a unified point of access for all financially relevant information. 
  • Balance sheets, income, and cash flow statements are classified as financial statements. They outline how finances flow in and out of business, identifying where the funds are going and for what reason.
  • There are also varying types of accounting that serve different purposes to an organization:
    • Financial accounting: preparing annual financial statements to verify a business’s financial health. 
    • Managerial accounting: the generation of financial statements to adjust internal business practices. 
    • Tax accounting: ensuring your business complies with all governing rules and regulations and consistently fulfills its financial obligations with tax collecting authorities. 
    • Cost accounting: a detailed analysis of the required financial requirements to produce output. This includes decisions about expenditure, pricing structures, and inventory management.
    • Credit accounting: covers liabilities and dues owed. Credit accounting keeps businesses from swimming in debt. 
  • The financial departments for some organizations employ professionals versed in all accounting categories for a well-rounded approach to finances. However, most organizations prioritize the information they need and introduce tax accounting or credit accounting professionals as needed. 

Major Functions of Accounting

  • Control Over Financial Policies and Planning

One of the key reasons to employ accounting practices is to create crisp information flows. For example, understanding a company’s financial status can be difficult if you are unsure what to look for. Accounting professionals help compile the information necessary to understand a company’s current status. 

With this insight, those who sit in a managerial capacity can make better decisions regarding existing financial policies. Additionally, the information provided offers guidelines for future planning. Better decisions are made when knowledge is maximized.

  • Budget Preparation

Accounting helps businesses figure out where their income and expenses come from. This information is also proven by the financial statements that your accounting department has put together. Understanding how much is coming into your business and how much needs to go out on average gives corporations a better idea of budgeting.

Businesses now understand the extent of their recurring costs and their income on good and bad days. With monthly records kept, budget estimates paint a more accurate picture. This way finance and accounting for small businesses helps in planning better future.

  • Cost Estimations

Before a transaction is complete, a cost estimate is established. This helps the business plan for both best and worst-case scenarios. In addition, the estimate offers insight into what may need to be spent. Finally, the actual costs are recorded when the activities are executed, and the two figures are compared. 

When actual costs and estimated costs differ, businesses can paint a better understanding of internal efficiency. For example, higher costs could be indicative of breakdowns that should be addressed. On the other hand, lower costs might show you where you can save money without hurting the quality of the output.

  • Employee Evaluations

The accounting department keeps a firm eye on incomes and expenses. This includes the revenue from completed projects and the costs incurred to achieve the same. Then, when employee evaluations come around, using finances to gauge the practicality and success of onboarding becomes transparent. 

Look at the projects the employee has worked on. Has there been consistent successful completion? Compared to the costs needed to maintain their contract, are they able to execute or contribute to revenue-generating activities? Do the projects they undertake cause disproportionately large expenses to the company? 

  • Error and Fraud Prevention

With finances, there is minimal room for error. Any discrepancy that arises is a question that must be addressed. The accounting process consists of multiple verifications before final entries are recorded and saved. This allows accounting professionals to identify any suspicious-looking entries or verify a concern.

Especially in bigger organizations, missing small amounts may not be uncommon but is certainly preventable. Moreover, maintaining iron-clad protocols with your finance department could prevent small amounts from turning into major losses. 

Conclusion

The major functions of accounting, including keeping financial records transparent, organized, and verified, could save a business from major future losses or liabilities. Maintain a firm accounting department with verified professionals to offer the guidance needed to keep the business running. In addition, the objective is to introduce better financial management practices to maximize every investment and create better returns. This can only be achieved by ensuring every penny is accounted for. The investment into financial management, over time, pays for itself. Choose Invensis if you’re looking for F&A services. Invensis’ comprehensive suite of customized Finance & Accounting BPO services enables your business to enhance its operational and financial agility by streamlining and optimizing key processes.

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