Let us know, as to, what are the top 10 features of accounting? Also, see how these features help us to know accounting in a much wider aspect and also to know its scope & importance as well
What are the top 10 features of Accounting?
1. Recording, Classifying, Summarising, Analysing, Interpreting the Financial Information
One of the features of Accounting is the art of recording all the business transactions in chronological order in Journal, the book of primary entry. Then, all the recorded transactions are transferred to Ledger, the book of secondary entry. This process is called Recording & Classifying the business transactions.
All the business transactions are balanced in Ledger and these balances are transferred to Trial Balance, a statement to show that all the debit and credit balances are equal. This process is called, Summarising the business transactions. Finally, we shall transfer all the balances from Trail balance to Financial Statements such as the Balance sheet and Profit & loss statement. These financial statements show the financial performance & position of the business entity. This information would be helpful for investors, creditors, debtors, banks, government, and management to make useful decisions. This process would be called Analysing & Interpreting the Financial Information.
2. Ascertainment of Financial Performance & Position by Financial Statements
Financial Statements are statements to depict the financial performance and financial position of the business entity. These Financial Statements would include Trading, Profit & Loss Statement, Balance Sheet, Cash Flow statements. The information contained in the financial statements would be useful to Management, Suppliers, Creditors, Debtors, Government to make useful decisions. For example, healthy financial statements encourage investors to make investments in such a business entity as it is a profit-making company.
The Balance Sheet is a statement of Assets and liabilities which gives information on the financial standings of the business entity. This Balance Sheet helps to know the value of the business entity, its assets & liabilities, capital & reserves, Net worth and capital employed.
Similarly, the Profit & Loss Statement helps to know financial performance such as profit made or loss incurred by the business entity. This profit and loss statement gives the pictures of sales made, purchases made, expenses incurred, incomes earned, profit or loss incurred during the financial period.
We have a Cash Flow Statement that gives the cash position and Cash flow made during the period. Cash flow is cash inflow and cash outflow occurred during the period. Cash flow depicts Net cash flow from Operating Activities, Net cash flow from Investing Activities, Net cash flow from Financing Activities. This statement helps to know the Beginning cash balance, Closing cash balance. This probably would help us to manage the cash and cash equivalents of the business entity.
3. Communication of Financial performance & position to Users
The information contained in the financial statements is revealed to the users of financial statements to make useful decisions and judge the financial performance & financial position of the business entity. The users of financial statements would include suppliers, debtors, management, government, investors, shareholders, banks, credit rating agencies, creditors, employees. The financial statements help the users of financial information to make decisions. For example, healthy financial statements induce banks, creditors, suppliers to give loans and advances to the business entity. It also encourages the credit rating agencies to give high ratings to the entity.
These Financial Statements would include Trading & Profit & Loss Statement, Balance Sheet, Cash Flow statements. The information contained in the financial statements would be useful to Management, Suppliers, Creditors, Debtors, Government to make useful decisions. For example, healthy financial statements encourage investors to make investments in such a business entity as it is a profit-making company.
4. Prevention and Detection of Frauds, Errors, Forgery
One of the main features is to Prevent & Detect all the frauds, errors, forgeries happening in the business organisation. It is the responsibility of the management to prevent & detect all the frauds & errors in the business organisation. Management can also implement internal audits to check and examine the internal control systems. This internal audit helps management to ensure that all the internal control systems are appropriate, sufficient, existence. This internal audit helps to ensure that all the internal control systems are functioning smoothly and efficiently. This also helps to reduce fraud, errors, forgeries etc.,.
5. Accounting as the Language of Business
It is the language of business. It means all the business transactions are recorded as per the applicable accounting standards, principles, policies that will be understandable by Accounting Professionals. It is widely accepted across the globe as these standards, principles, policies are mostly same across all the countries.
Here, the managers, bookkeepers, professionals communicate the financial information to the users of financial statements using financial statements such as balance sheets, profit and loss statements. cash flow statements. This is the communication on the financial performance and financial position of the business organization to the users of financial statements to make decisions.
6. Assists in Planning, Budgeting and Decision Making
The financial information contained in Ledgers Accounts, Subsidiary books, Journals, Balance Sheet, Profit & loss statement, cash flow statement is used by bookkeepers, managers in making useful decisions on growth & expansion, profitability, survival of the business organization. For example, if the company is making losses, then this information would be useful to design strategies on how to become profitable and how to leverage the financial performance of the entity.
The information contained in the financial statements would be useful to Management, Suppliers, Investors, Creditors, Credit Rating Agencies, Debtors, Government to make useful decisions. For example, healthy financial statements encourage investors to make investments in such a business entity as it is a profit-making company. For example, healthy financial statements induce banks, creditors, suppliers to give loans and advances to the business entity. It also encourages the credit rating agencies to give high ratings to the entity.
7. Applicability of Accounting Principles, Policies & Accounting Standards
Accounting is performed as per the applicable standards, principles, policies to ensure that financial statements prepared are free from misstatements, frauds, errors. This ensures financial statements are prepared and presented as per the applicable laws, principles of the state.
Any deviation from these laws, principles, policies may result in non-compliance. This may further encourage the Auditors to express a qualified or adverse opinion on financial statements. It is the responsibility of the management, board of directors to ensure that they comply with the applicable standards, principles, policies while preparing & presenting financial statements.
8. Assists in Financial Management
Accounting also helps to manage the finances mobilised from banks. It also helps to optimally utilise the funds mobilized from financial institutions and banks. Thus, Financial Management is all about managing the funds, financial statements. Financial Management starts where Accounting ends.
Financial Management is concerned with mobilizing funds from financial institutions, banks and optimum utilization of such funds mobilized. The funds or cash borrowed shall be optimally utilised while making investments in assets and funds mobilized shall not be wasted at any cost.
9. Tax calculation & Tax planning
Accounting also helps to calculate & save the applicable taxes as per the laws using financial statements. It may be income tax, goods & service tax, professional tax. Income tax is calculated on income earned during the previous year and levied in the financial year. Goods and Service tax is a tax on the supply of goods and services as per the applicable laws of the country. Tax planning is generally made to reduce the payment of excess taxes by availing tax deductions as per the applicable tax laws.
10. Audit of Financial Information
Auditing is an independent examination of the financial information contained in the financial statements of any organisation with a view to express an opinion on financial statements by the Auditor. The audit is generally performed to examine all the information contained in books of accounts and financial statements and to express an opinion on financial statements. Generally, Auditor gives an opinion on financial statements if these statements are prepared as per the applicable accounting standards, principles, policies and procedures. Also to ensure that these financial statements are free from frauds, errors.
Management can also implement internal audits to check and examine the internal control systems. This internal audit helps management to ensure that all the internal control systems are appropriate, sufficient, existence. This internal audit helps to ensure that all the internal control systems are functioning smoothly and efficiently. This also helps to reduce fraud, errors, forgeries etc.,.
A statutory Audit is performed as per the laws of the state every year, whereas an internal audit is performed to check the internal control systems of the business organization. The audit is also performed as per the applicable auditing standards and regulations of the state.
Conclusion
Thus we can conclude, as to, what are the top 10 features of Accounting? This would also help us in recording the business transactions and communication ascertained results to the users of financial information to make decisions. It also helps in tax calculation and audit of financial statements as well.
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