Advantages | Disadvantages 7 Function of Financial Accounting

Financial accounting is a branch of accounting that focuses on the recording, summarizing, and reporting of a corporation’s economic transactions. It presents information to external events, including buyers, lenders, regulators, and internal customers, such as managers and employees. In this article, we are going to discuss all function of financial accounting that is explained in 7 parts. Then, you can also learn the advantages and disadvantages of financial accounting. Now, we will start with an explanation of the above-mentioned topics:

Major 7 Function of Financial Accounting

1. Identifying

Identification of the transactions relating to the business directly is the primary function of financial accounting from the root documents.

2. Recording

Once the business transactions are identified, the next step involves proper recording thereof in terms of money. Such recording of business transactions is carried out in a book termed as Journal which may be further subdivided for convenience sake into various Subsidiary Books.

3. Classifying

Various business transactions recorded in Journal are further classified based on their nature. Their posting follows similar items in another book called Ledger. Journal entries simply record various business transactions without any differentiation. Whereas, the Ledger posting is done after classifying each entry under the appropriate head transactions without any differentiation. Whereas, the Ledger posting is done after classifying each entry under the appropriate head.

4. Summarizing

It relates to the business transactions of an organization is very useful for the stakeholders both internal and external to the business. Internal users are generally the management and employees of the organization. Whereas, the external users are the creditors, investors, regulators, taxmen, labor unions, trade associations, etc.

5. Analyzing

An in-depth analysis of financial statements Profit and Loss Account and Balance Sheet of an organization. It helps identify the organization’s financial strengths and weaknesses. Such analysis facilitates overcoming the flaws and utilizing the power for the betterment of the organization.

6. Interpreting

Interpretation is the essential function of financial accounting. It is helpful for the management in the decision-making process and formulating a future business strategy concerning growth, expansion, and diversification. Other stakeholders also benefit from such data in taking decisions from their perspective.

7. Communicating

Communicating the duly summarized and analyzed financial data to other stakeholders enables them to interpret the same in their ways. It considers their interests for decision-making at their own level.

All seven points refer to the function of financial accounting. If all functions are works properly then you can see the flow of financial accounting. Now, we are moving on to the Advantages of financial accounting.

Top 5 Importance/Advantages of Financial Accounting

There are advantages of financial accounting . Also, we can say the importance of financial accounting that we are going to mention below:

1. Helps in Management

The information generated through the process of accountancy enables the management of a company. It is very helpful to perform their job efficiently by appropriate planning, monitoring, and taking decisions to the advantage of the business organization.

2. Substitute to Memory

Accounting necessitates recording all business transactions in a scientific and classified manner. It eliminates the need to memorize all the transactions entered into by a business organization.

3. Comparative Study

The end products of Accounting are financial statements in the form of Profit and Loss Accounts and Balance Sheets. It allows the management of a company to compare the annual result of a year. Also, It can initiate requisite actions, necessary for the growth of the business …

4. Settlement of Taxation Liability

Proper maintenance of books of accounts ensures hassle-free assessment of tax liabilities by various Government Departments, especially Income Tax, Service Tax, and Sales Tax authorities. It is importance of financial accounting but sometimes it works as a function of financial accounting.

5. Evidence in Court

A systematic record of all the business transactions may be produced as evidence in a court of law. Courts are inclined to accept such records as good evidence.

In this portion, we have explained the essential advantages of financial accounting. But, we also need to know about all the disadvantages of financial accounting in the next segmentation.

Disadvantages of Financial Accounting

We will discuss the drawbacks of financial accounting. These are the major disadvantages of financial accounting that we mentioned below:

1. Non-Monetary Items Overlooked

Under the accounting system all the business transactions which can be expressed in terms of money are recorded. Non-monetary business transactions are completely out of the purview of the existing accounting system.

2. Original Cost

The original cost is considered while recording the details of fixed assets. The amount spent on them, which logically should be added to their acquisition cost, is not considered. As a result, their true value is not reflected in the ‘Balance Sheet’ of the business entity.

3. Possibility of Manipulation

The accounting System envisages profit to be the only parameter to assess the performance of the company’s management. This concept is illogical and need not be considered trustworthy as certain major items especially those relating to Research and Development, Advertisement, etc., are excluded.

4. Bases on Estimates

Accounting data and books are reliable of accounts are sometimes based on estimation instead of the actual. Such data need not be correct. That is the major disadvantage of financial accounting.

5. Rule of Consistency

At times, some companies fail to observe the basic tenets of accounting. The underlying principles of companies are compromised infrequently in certain cases. Change is especially policy relating true in the to case depreciation of fixed on assets fixed assets, from as year few to year. The rule of consistency defines the continuous process then the function of financial accounting is not worked properly.

Conclusion

We have explained the all major function of financial accounting. If you want to work properly then you need to use the all functions. Therefore, we also explain the advantages and disadvantages of financial accounting.

Other Related Informative Articles

You can also read some other articles to enhance your knowledge:
1. To know about Accounting Information System.
2. Learn more about User of Accounting Information.
3. Top 10 Qualitative Characteristics of Accounting Information.