Main Functions of AccountingHow Accounting helps Companies keep Accurate Financial Data

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Understanding the Main Functions of Financial Accounting

A clear understanding of financial accounting functions helps companies keep accurate financial data of business operations.

Several years ago, bookkeepers manually entered all the financial transactions into individual ledgers to produce financial reports.

Now, the task is simplified through the use of accounting software.

Each transaction is recorded in the general journal and is done systematically – making note of important information such as the date, amount, and the account under which it has to be posted.

When recording, double-entry bookkeeping is observed.

This means for every debit, there must be an equal corresponding credit.

This also means that for every change in the transaction journal, the changes should automatically be updated in the ledger balance.

Once a transaction journal has been recorded, the transaction is posted to its specific ledger.

This shows the summary of all the transactions recorded under the transaction journal.

For example, if you wish to see the amount spent on utilities for a specific period, you only need to look at the Utility Expenses ledger and all the details will be there.

Once the ledger accounts are summarized, the next step is to prepare the three most important financial reports: Balance Sheet, Income Statement & Cash Flow Statement.

Balance Sheet

balance sheet

The Balance Sheet shows the financial position of a company at a given point in time.

is composed of the company’s Assets, Liabilities, and Owner’s Equity.

Income Statement

Income statement

The Income Statement shows the financial performance of a company for a specific accounting period.

It shows the revenue and the corresponding expenses of the company. The profitability of the company is measured through the report provided by the Income Statement.

Cash Flow Statement

Sample Cash Flow Statement

The final function of financial accounting is interpreting the data provided by the Cash Flow Statement to help external parties interpret the company’s profitability.

It breaks down the revenues and expenses recorded in the Income Statement and shows the money that goes in and goes out of the company.

The Cash Flow Statement shows three main sections: cash flow from operating, investing, and financing activities.

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  1. Northeastern University "What Does an Accountant Do? Responsibilities, Skills & Trends" Page 1 . November 3, 2022

  2. University of Minnesota "12.1 The Role of Accounting" Page 1 . November 3, 2022