Basic Accounting Functions
Basic accounting functions are not only important life skills; they are critical to the proper management of a business. Careful record-keeping is essential to ensuring compliance, being able to illustrate growth and progress over time and being accountable to company investors or lending institutions. It’s always important to know how much money was spent, for what and when. Having this information on hand and stored in an organized way makes it easy for companies and groups to know what is working financially and what might need to change to ensure improvement in the future.
The three major functions of accounting are:
- The collection and storage of data concerning a business’s financial activities. The information is gathered from source documents, recorded first in journals then posted to ledgers, either manually or with accounting software.
- To supply information that can be used for managerial reports, financial statements, strategic planning and decision-making.
- To provide controls that effectively, efficiently and accurately record and process data.
Accounting plays a critical role in business. Comprehensive record-keeping ensures the ability to provide accurate financial reports, which may be required during an audit, for quarterly reports to investors or lending institutions. Everything from annual or quarterly tax filings to audits and applications for credit will likely require detailed financial statements. It’s only by the maintenance of careful accounting records that this information can be readily available when needed.
Being able to analyze aspects of a business’s financial health such as cash flow, profitability and outstanding loans is a critical part of running a company. With this information in hand, managers or owners can determine what is working for their business and what isn’t, as well as what areas they might work on to improve the company’s overall financial health going forward.
A special type of accounting called management accounting is particularly useful for company leaders. For management accounting, accountants are tasked specifically with preparing financial reports that will assist managers in making important decisions to guide the future of the company. This differs from financial accounting in that management accountants provide guidance as to how to run a business. On the other hand, financial accountants provide reports that indicate how well the business is being run. Overall, both management and financial accountants follow the same golden rules of accounting and must adhere to the same industry standards and general accounting principles.
If you’re interested in a career in the accounting field, you may be wondering, what are the major functions of an accountant? Accountants are essential to businesses of all sizes and types because they are responsible for the collection, accuracy, recording, analysis and reporting of a company’s financial information. Sometimes, accountants serve in a largely administrative role, taking information from financial documents and inputting it into the journals or accounting software. In other instances, accountants serve as advisers to the company, analyzing financial records and suggesting approaches the business might take to save money or to encourage growth. Larger companies might have entire accounting departments, with employees who fill each of these roles. In some instances, small companies may outsource their accountants. This is possible since the basic rules of accounting do not vary from industry-to-industry or among companies.
No matter the business, accountants are usually charged with collecting, organizing and maintaining the company’s financial records. An important part of this task is ensuring that records are compiled within the confines of the law and any industry regulations. For companies with many branches and accountants in each, it’s also incumbent on the accountant to ensure that corporate accounting organizational systems and standards are honored, as well. It’s important for the sake of consistency that the entire company maintain its records the same way.
Accountants may be required to prepare tax forms on a quarterly or annual basis, depending on the needs of the business. Depending on the size of the company, someone in this role may also take on human resource functions, and deal with the distribution of year-end tax documents to employees. Many accounting departments are also responsible for preparing staff paychecks.
If a company uses external Certified Public Accountants, tax professionals or financial advisers, it may be the role of the business’s accountant to interface with these contractors. The staff accountant may maintain additional records, organize needed financial statements before meetings or act as the company’s representative in meetings with the contractors. Accountants also assist in making important financial decisions.
Every course of study in accounting will ask students to answer the basic question, what are the golden rules of accounting? There are three major principles taught and considered to be the golden rules. This means that they are consistent across companies and industries. They don’t change, regardless of the specifics of a business.
To understand the golden rules of accounting, you must first understand the double-entry system of bookkeeping. Every financial transaction will, under this system, by necessity impact at least two accounts from the chart of accounts. For instance, if a customer paid for a large order of T-shirts that cost $1,000, you would debit the income category by $1,000. However, the previously outstanding amount for the shirts would have also been listed under accounts receivable. Therefore, an accountant would need to credit that category by $1,000.
The first golden rule of accounting follows this principle and states that you always debit the receiver and credit the giver in any transaction. This is true in the case of personal accounts, which can be defined as accounts relating to an individual, company or an institution. By consistently following this principle, you should always make two entries for every financial transaction.
The second golden rule of accounting states that you should debit what comes in and credit what goes out. This is, in essence, the same as rule number one, but it is not used for personal accounts. Instead, this rule is valid in the case of real accounts which start with a debit balance. Real accounts are balance sheet accounts including assets such as cash, accounts receivable and buildings, liability accounts such as accounts payable and salaries payable and stockholders' equity accounts such as common stock and retained earnings. So in the earlier example, the accountant would debit the incoming cash. If, on the other hand, the company spent money to purchase supplies, that transaction would be represented as a credit to the company.
The third golden rule of accounting applies to nominal accounts such as those involving capital. They can include anything related to income and expense such as rent paid, discounts, bad debts and commissions. The third rule states that you must debit all expenses and losses, and credit all incomes and gains.
If you are hoping to learn about accounting, or if you want to set up a basic accounting system for your small business, there are some essentials you need to familiarize yourself with. Traditionally, financial record-keeping was done manually. The book used to track financial transactions is called a journal. Today, you might prefer to use accounting software, but the term “journal” still appears frequently, even in electronic accounting. Furthermore, the basic principles are the same.
A transaction is a financial event that needs to be documented. You track the amount of the transaction along with the date it occurred, a description and the account it is debiting or crediting.
Sometimes, a business may use multiple journals to track transactions related to different accounts. For example, a cash receipts journal may be used to organize your list of monies coming in, while a cash disbursement journal may be used to record the funds going out. A cash disbursement journal is the same as a checkbook register.
To prepare for a potential audit and to keep clean books, you should always use a separate checking account or credit card for business transactions. Mixing personal and corporate accounts not only makes record-keeping more complicated but may also raise red flags during an audit.
Accounting relies on a chart of accounts for its framework. This list of categories of income and expenditures includes, for example, assets, liabilities, owner’s equity, revenue, cost of goods sold (not applicable to a service company) and operating expenses. Other income and expense accounts are added as required.
When tracking financial transactions, each transaction should be categorized according to its type. Financial statements usually only include the total of each account category, rather than individual transactions. A monthly, quarterly or annual financial report like the balance sheet, for example, includes the total assets, total liabilities and the resulting equity.
When financial statements are prepared, the state of the company is represented on a balance sheet. It's like a snapshot of a company's financial health at a particular point in time. Assets are either tangible or intangible things the business owns such as cash, accounts receivable (money owed to the business by customers), investments, buildings, land, equipment or other belongings. On the flip side, liabilities are what the company owes to others such as loans, credit card bills or mortgages. Equity or capital, the third category on a balance sheet reflects the company’s investments in the business and any profit or losses for the business since it began. The three categories must balance, so assets must be equal to the owner’s equity plus liabilities.
Other accounting categories are typically not included in large-scale reporting. However, income, cost of goods sold and operating expenses are recorded in the business’s general ledger, which consists of the balance of every account that is tracked by the company. Income or revenue are the funds earned by the business from the sale of goods or services. If the company produces goods rather than sells services, the cost of the product is recorded and is known as the cost of goods sold. Operating expenses, the costs of running the business from day-to-day, are also recorded and include utilities such as heat and hydro for the office, internet services or rent, among others.
In addition to the balance sheet, the income statement or profit and loss statement (P & L) is an essential financial statement which shows revenue minus expenses with the resulting net income or loss.
It's vital to have a skilled accountant no matter what kind of business you're in or which industry. From matters of compliance and regulation to day-to-day and long-term guidance, accountants analyze the most complicated financial aspects of a business and provide important advice. Accountants can tell you what’s going well in your business and alert you to what should be changed to ensure maximum growth. All companies must prioritize accounting, whether they have just one dedicated staff member, a contractor or an entire team of management and financial accountants.