Functions of Accounting in Business Firms: Financial Statements, Ratios, and Budgets

Unit - 5

Contents
INTRODUCTION...............................................................................................................................3
TASK.........................................................................................................................................3
1. Elaborate on the purpose of accounting..........................................................................3
2. Discussion on the functions of accounting that are needed in the business firm
pertaining to the regulatory and ethical constraints................................................................4
3. Present the financial statements in order to meet the accounting standards and
principles................................................................................................................................5
4. Computation and interpretation of the financial ratios...................................................6
5. Represent the contrast of the financial achievements and results for satisfying the
conditions of the financial ratios:...........................................................................................8
6. Preparation of the cash budget from given information for an organisation using a
spreadsheet.............................................................................................................................9
7. Description of the benefits and drawbacks linked with the budgets and budgetary
planning and control for an organisation..............................................................................11
CONCLUSION..................................................................................................................................13
References..........................................................................................................................................14

INTRODUCTION
The term accounting refers to procedure of recording, analyzing and summarizing the
financial transactions to provide the business with the financial results. It is not possible for
the business to keep in mind all the transactions that takes place in the day – to – day
business, so it is very important for a business to work on maintain the reports and thus it has
become really very relevant to each and every organization. There are three main financial
statements. The reports look into the purpose and role of accounting standards in relation to
the moral practices and statutory compliances. Along with this the report along comprises of
the preparation of financial statements and trial balance. Furthermore, it also encompasses
with the calculation of ratio analysis with their interpretations. Moreover, it also contains the
creation of cash budget and the theoretical data on the limitations and advantages of the
budget and budgetary planning and control within the business organization.
TASK
1. Elaborate on the purpose of accounting
Accounting refers to the creation of financial information. With the help of such data a
company can see how much it has earned and paid in the financial year. It also provides the
ideas on the grounds to the company where it can make more money. Accounting is crucial
for the for the company for the various reasons. Accounting enables the business owner to
identify, analyze, interpret and record the business transactions and communicate the same to
the internal parties and track the position of a business concern.
The purpose of accounting is elaborated below:
 It helps in the better management of business: Accounting data provides with the
accurate and reliable facts and figures that reflects the financial position of a business
concern. All this forms a base for decision making. It also helps in evaluating the
condition of assets and liabilities of a firm.
 To create budget and make projections for future: The business firm can examine the
financial statements of the company and can make presumptions on the future cash
inflows and outflows. Present accounting reports gives an idea to the company about
how their assets and liabilities are going to perform in future and also provide the base

for the preparation of budgets which will help the company in achieving the better
results.
 To present the reports for auditing: It is very important for a company to maintain the
accounting reports. During the time of audit, a company can present the record to the
auditors and can take their help regarding the corrective decisions that are to be taken.
 For presenting the records to the interested parties: The firm provides record to the
external parties in order to seek investments from them. Without such data the
business enterprise cannot think of even raising funds as these records are very
important for the organization to gain trust of the shareholders, creditors, investors
and suppliers. These people are associated with the business and by analyzing the
financial statements they determine whether the company will be able to repay the
loan amount that it has taken or not (Oyewo and Akinsanmi., 2021)
 Tracking the movements of cash inflows and outflows: Accounting makes it possible
to the business to track its expenses, losses, income and gains in the chronological
order. In short it helps in gaining insights on what it owns and what it owes to the
company.
 To meet the legal requirements: It helps in meeting the statutory needs. A company
must have its accounting data for meeting the needs of law for different legal purposes
like annual accounts, income tax return, sales tax return etc.
 To ascertain the profit and loss: Accounting assists the business in the evaluation of
how much profit and losses a company has incurred by making payment for its
expenses. It helps the company in estimating the activities which are not necessary to
perform and charges the higher cost.
2. Discussion on the functions of accounting that are needed in the business firm pertaining
to the regulatory and ethical constraints.
Accounting plays a significant role in various field of commerce, market, banks,
industries, and culture. The financial data is not only useful to the internal parties but they are
also useful to the external parties. This is because the investors, creditors, suppliers,
customers and other financial institutions can rake good reliable and accurate decisions based
on such data. To satisfy the users distinct accounting principles have been framed. The
accounting principles are mandatory to follow when the business is recording its day – to –
day transactions and settlements (Weygandt and et.al., 2019). These guidelines are applied in
and every organization in the world and is universal in nature. Different countries have