What are the Functions of Accounting?

There are several functions of accounting from bringing transparency in the system to detecting financial frauds. These accounting functions ensure a more stable and thriving financial structure.

Before we learn about the functions of accounting, we must know about this branch of finance that is crucial for every earning entity.

Table of Contents

• What is Accounting?
• Functions of Accounting
  • Financial Management
  • Cost Management
  • Making Business Decisions
  • Taxation and Compliance
  • Maintaining Transparency
  • Risk Management

What is Accounting?

Accounting is an important financial practice for every business. Without the existence of accounting, financial management is not possible. This finance branch deals with analyzing, summarizing, documenting, and reporting financial data to the management. This helps in understanding the financial status of the organization in-depth and with accuracy,

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Functions of Accounting

There are many branches of accounting that are crucial for different areas of operations and serve different purposes. Let us now understand accounting functions in detail:

1. Financial Management

With accounting, management and external regulatory bodies can assess the financial situation of a company. Financial documents help gain an in-depth look at assets, liabilities, the share of equity, revenue, profit, and loss. Businesses can remain compliant with legal and tax regulations. Overall, it helps maintain transparency in the system. 

By tracking the business expenditure compared to the income, financial experts can keep a tab on business revenue and costs. Through financial accounting, businesses can ensure making and receiving timely payments. This prevents any payment pending past the due date which makes the business more trustworthy to deal with. 

Apart from understanding the financials of the business, companies use financial analysis for the purpose of performance analysis. Through financial statement analysis, one can identify liabilities and assets in the structure. They can also analyze the loopholes in the system so that they can have better financial management. Businesses can also analyze ways to streamline and optimize production processes.

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2. Cost Management

It involves the analysis of business expenses to prevent wasteful purchasing practices and cost reduction to improve revenue. It helps organizations in taking actions to reduce costs and expenses to boost profitability. Cost accounting also monitors ordering raw materials so that they are not over-purchased, about to expire, or perish. 

This prevents the waste of capital on unnecessary raw materials. Cost accountants prepare reports to determine the profitability of every product so that management can maximize their profits. Data presented through cost accounting is used for decision-making and management planning. Overall, companies can plan their budget and set up budgetary controls based on the information provided by cost accounting.

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3. Making Business Decisions

This is primarily for management’s internal purposes so they can make important business decisions. Using meaningful information, businesses can use the data for short-term and long-term business planning. Management accounting provides statistical and accounting data. Based on this data, companies can forecast and plan strategies for the future. It also helps them understand the most useful resource for the company. 

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4. Taxation and Compliance

Tax accountants also take care of timely tax payments and even report them to designated authorities. They maintain provisions for taxation so that they can avoid any penalties as per the law. These professionals analyze fiscal matters, and based on this analysis, they prepare, manage and submit tax statements and returns for clients. They also prepare business income tax returns and audit statements. 

5. Maintaining Transparency

One of the most important functions of accounting is to bring transparency to financial structure. For this, various reporting standards, such as IFRS and GAAP, are adopted by organizations. This ensures that financial statements across different organizations are comparable and understandable globally.

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Along with adopting reporting standards, organizations conduct internal and external audits. Companies conduct internal audits to ensure that they are ready for external audits. In internal audits, every process and document is analyzed to ensure that the company complies with laws and guidelines. External audits are conducted by external authorities to ensure that every regulation is being followed by the organization.

Forensic accounting also plays a major role in ensuring that the company is legally operating. Through this investigative branch of accounting, accountants ensure that there are no financial frauds going on in the organization. It also helps in detecting anomalies in the system for accurate financial reporting.

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6. Risk Management

Another crucial function of accounting includes risk management. Companies use the data collected through accounting to analyze areas of risk. They also analyze resources that are not as useful as expected and investments that are not giving expected returns. Based on the data and analysis, organizations can take steps for risk mitigation. This will ensure that company is within the limit of its risk tolerance. 

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Conclusion

Hope that through this article, you have understood the most important functions of accounting. Accounting is fundamental for any financial entity to survive and thrive. With the adoption of principles of accounting, businesses not only sustain but generate profits while being compliant with laws.

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