What is the Basic Function of Accounting?

Basically, the function of accounting is to keep an accurate track of money coming into and going out of a business. However, there is much more to an accounting job than just watching money come and go. If you are considering applying for a position as an entry-level accountant or a bookkeeper, then there are certain things you should know.

What does the job involve? What is the basic function of accounting? Are there different types of accounting? Where can I go to get advice and qualifications?

As an accountant or bookkeeper, you will collect and report on financial information regarding cash flows, performance, and the overall financial position of a business. The information you provide is essential in helping to make decisions on how best to manage the company. All this information is collected from standard business operations such as invoices to customers, bills from vendors and suppliers, and other internal transactions called journal entries. These transactions are then recorded in the company’s accounting system.

What is the basic function of accounting?

Several basic functions are the responsibility of an accounting department:

Accounts receivable (A/R)—This is the term for tracking payments made by customers for goods or services. Also creating and tracking customers’ invoices and ensuring payments are made when due.

Accounts payable (A/P)—As with A/R, A/P means keeping a record of all goods and services bought by the company and making sure payment is made on time. This is particularly important if suppliers or vendors offer discounts for early settlement.

Inventory management— This position tracks all goods purchased and stored for resale, ensuring that a system is in place to maximize profits. For example, one inventory management system also known as FIFO; First In First Out. This ensures that inventory does not stay on a shelf and forgotten about because a new product has arrived.

Payroll—Calculating employees’ hours, salaries, bonuses, benefits, and commissions correctly plus tracking time off both paid and unpaid is an incredibly important role in any company. You are also responsible for paying the payroll taxes to the government. These taxes include FICA (social security and Medicare taxes), unemployment, workers’ compensation, and federal and state withholding tax.

Budgeting—The budgeting department establishes an annual budget for income and expenses and keeping track of expenses to make sure that expenditure stays within the company’s budget. When creating a budget, it should use both a cash basis and an accrual basis. Accrual accounting is where income or expenditure is recorded when the transaction occurs, and not when making or receiving payments. A budget based purely on an accrual basis will not give an accurate picture of cash flow. Similarly, a cash basis budget may not show accurate information on the business’ performance. Combining the two methods gives you the best of both worlds, leading to a more accurate budget.

Financial statements—One of the vital functions of an accounting department is producing and delivering accurate financial statements to assist with monthly forecasts, and end-of-year reports. Therefore, all the financial information and transactions of the business are recorded throughout the year so that accurate reports and financial statements can be produced.

Management reporting—Depending on the company’s structure, management reports may be produced on a monthly, quarterly, or annual basis. These reports may be as simple as a monthly cash flow forecast statement, or as complex as a full, detailed profit & loss statement, showing monthly figures, budgeted figures, and any variance from budget to actual. Reports like this are generally produced using a spreadsheet, taking advantage of the many financial functions built into the spreadsheet.

Legal compliance—The accounting department of any business must be able to show that the business follows the complicated rules, processes, and policies that regulate businesses in a specific area. It is not enough to know and understand the rules that apply to the business, it must show that the business is always compliant. This process includes, but is not limited to, keeping copies of all checks, invoices, bills, and payroll records, and making them accessible to show that the correct people have the responsibility for keeping the business in compliance.

Financial control—This is an equally important function of the accounting department. Every business needs some way to check and manage its finances. This is normally done using three main financial statements, a cash flow statement, an income statement (also known as the profit and loss or P&L statement), and a balance sheet. By studying the information contained in these three reports, a business owner can ascertain how the business is performing and identify where changes can occur.

Record keeping—One key element in the smooth running of any business is good record keeping. Being able to lay your hands on a bill that is in dispute along with a copy of the canceled check proves that the debt was paid. Not only is good record keeping an advantage to the business, but according to the IRS, there are basic rules as to how long certain documents must be retained and accessible for tax purposes. For example, Accounts payable and receivable paperwork should be retained for seven years. Bank statements, canceled checks, and any electronic payment records are also seven years, but bank reconciliations need only be kept for two years. In reality, a bank reconciliation is usually kept with the bank statement, so they will remain for the same seven years.

What are the Different Types of Accounting?

If you are considering working in the field of accounting, then you should know what different types of accounting are available. Here are the most common types of accountancy jobs for you to consider:

Financial Accounting

Management accounting

Cost accounting

Tax accounting

Financial Accounting

Anyone working in financial accounting is responsible for tracking, recording, and reporting all financial transactions by producing standard financial statements. This is done by adhering to the GAAP (Generally Accepted Accounting Principles) rules.

Financial accounting gives a precise look at how the company has performed over a specific period and does not predict future performance like management accounting. There are two kinds of financial accounting, cash, and accrual, and both use double-entry accounting when recording transactions. Most small businesses use cash accounting, but larger companies, including publicly traded companies, must use the accrual method.

Management Accounting

The information produced by management accounting is used solely by the company’s officers, unlike financial accounting reports which are given to shareholders and investors. Management accounts combine historical data with anticipated results to give management the tools they need to forecast results based on performance to date.

Cost Accounting

Cost accounting is a branch of accountancy that deals exclusively with the cost of doing business. This form of accounting is generally used in the manufacturing industry, although a service business can benefit from this form of accounting as well.

Cost accounting looks at the costs incurred by the business, both fixed and variable. Examples are raw materials, labor costs, production costs, overheads, and maintenance, giving the management important information such as the “break-even point”

Audit Accounting

Certain businesses and companies require an audit each year to be in compliance, especially if they deal with sectors of the Government like HUD or USDA. An auditor will examine all financial records kept by the accounting department to ensure they are accurately reported.

Unlike accountants or accounting staff, an auditor is not associated or involved with the business under audit. The two most common forms of an audit are:

A compliance audit examines the procedures and policies in effect by the company or business to make sure it is currently compliant with regulatory or internal standards. The results of such an audit may be reported to external entities if applicable.

A financial audit only analyzes the company’s financial statements for accuracy. When completed, the results most often are reported only to the company’s officers or owners and not to anyone outside the business.

Tax Accounting

Tax accounting is controlled by the Internal Revenue Code (IRC), and as such ensures that businesses, individual taxpayers, and non-profits follow the current tax rules. A tax accountant will work for these clients ensuring their tax returns are accurate.

A tax accountant must be familiar with the ever-changing tax laws so they can calculate any income tax due, lower any tax liabilities, and complete and file tax returns accurately and on time.

Want to Learn More?

Ready to start working in an entry-level role as a bookkeeper or accounting specialist? At ICT, our Accounting & Professional Business Applications program will teach you the fundamentals of accounts payable/receivable, payroll, general ledgers, reporting/data entry, and office automation. You will be prepared to support any size organization and make a difference in your accounting department.

Let’s take the first step together! Contact us now to learn more.

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