The Functions of Financial Accounting

What are the different functions of financial accounting?

The Functions of Financial Accounting
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Below article discusses about the various functions of Financial Accounting. It also stresses the importance of accounting and its functions for any type of business entity.

Financial Accounting is the very essence of a business enterprise to manage effectively and efficiently the economic information expressed in terms of money. In the absence of financial accounting and its functions, the activities of a business will be nothing more than an ad hoc basis.

Encompassing some essential functions, financial accounting accomplishes the following objectives:

Financial accounting process involves some essential functions through which the operating results of a business entity may be ascertained accurately. The operating results are identified with the help of profit and loss statement. On the basis of significant summaries pertaining to innumerable business transactions that affect capital and assets and liabilities.The financial position of a business entity is revealed by a Statement of Financial Position, the balance sheet.

What happens to a business during a particular period of time, whether it maintains profitability or it bears losses may be determined, while using its functions for summarizing all the financial facts finally, financial position of a business at a particular moment in time is ascertained.The objective behind the whole process of financial accounting also includes enabling management to take necessary measures to control the operations of a business.

Since the process of financial accounting is composed of some necessary functions, they are outlined herein:

Recording: Recording of economic information which is of financial character is the primary function of financial accounting. It involves analyzing individual business transaction as and when it occurs, such as, what has taken place?Identifying the nature of account that involves.Ascertaining the rules of debits and credits etc.After the business transactions being analyzed, they are to be recorded systematically in a book called the book or original entry. The whole process of recording a business transaction is called Journalizing. When used separated journals, they are referred as subsidiary journals.

Classifying: Classifying of financial information is concerned with systematic analysis of the recorded data.

It involves posting of journalized transactions in the concerning ledger accounts by grouping them into the accounts that are of similar nature and balancing thereof. It is worth mentioning here, the advent of computers has aided this process significantly. Ledger accounts are balanced automatically when using a particular program developed for financial accounting purpose.

Summarizing: The transactions, having been posted and classified in accordance with the concerning ledgers, are then summarized in a particular manner in order to prepare the following statements. Trial Balance, Income Statement and Balance sheet.

Interpreting: This function involves analysis and interpretation of financial data. Since accounting is regarded as a business language, it provides necessary and the required information to its users through which the profitability and the financial position of a business may be ascertained, which in turn will be very much useful for planning and establishing various policies.

Communicating: After having been analyzed and well interpreted,the financial information is communicated to the intended users. The process undertakes preparing various reports including chief financial statements, such as, cash flow, funds flow, ratio analysis and presentations with graphs etc.

Financial Accounting, being known as the language of business, is of great value and importance to any business to provide a methodological approach in describing the financial activities of a business enterprise. As for any business, ascertaining the operating results during a period of time and the financial position at a specific point in time is necessary that in turn may lead to determine the performance as well as the value of a business, these objectives are accomplished with the help of Financial accounting process involving the aforementioned functions.


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