Introduction And Meaning Of Financial Accounting
Financial accounting is a process of identifying, collecting, recording, summarizing and reporting of monetary transactions of business in a systematic way. It discloses the financial position of the business by preparing financial statements and helps the management to make decisions and to formulate future plans and policies.
Key Functions Of Financial Accounting You Need To Know
The main functions of financial accounting can be highlighted as follows:
1. Identification And Recording Of Transactions
Firstly, financial accounting identifies business related financial transactions and records them systematically in chronological order to make easier to understand.
2. Classification And Summarizing The Records
Another function of financial accounting is to classify the transactions according to their nature and summarize them properly. Journal entries and ledger posting are made to classify and summarize transactions.
3. Analyzing The Data
After classification and summarizing, it analyzes the financial data by preparing trial balance, profit and loss account, balance sheet and other financial statements. Financial statements disclose profit or loss and the financial position of the business for a given period of time.
4. Communication The Result
After analyzing the data and ascertaining the result it communicates financial data and information to the stakeholders such as management, employees, investors, government etc.
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5. Facilitates Decision Making
It provides important financial information and statistical data which helps the management to take decisions. It also helps investors or lenders to make financing decisions.
6. Facilitates Future Planning
Management can make future plans and policies on the basis of information gathered by financial accounting.
7. Supporting Auditing
Financial accounting provides accurate financial data and information that supports in auditing process. So, it simplifies the task of auditor.
8. Helpful In Tax Calculation
It helps the company to determine the accurate tax liability that reduces the risk of penalties and fines.
9. Preparation Of Financial Statements
One of the key functions of financial accounting is to prepare financial statements such as cash flow statement, balance sheet and profit and loss statement that helps to reveal the financial health of the company.