The Finance Function and Accounting Systems
What the finance function does
The finance function records, reports and controls money. Core activities: bookkeeping, preparing financial statements, management accounting (budgets, costing), credit control, payroll, and ensuring legal compliance (e.g. tax). Candidates must know the difference between financial accounting (external reports, historical) and management accounting (internal, forward-looking, for decisions).
Accounting systems and controls
- Books of prime entry: sales day book, purchase day book, cash book, journal - where transactions are first recorded.
- Double-entry bookkeeping: every transaction has equal debits and credits; the trial balance checks arithmetic accuracy.
- Ledgers: receivables (sales ledger), payables (purchase ledger), nominal (general) ledger.
- Internal controls: segregation of duties, authorisation, reconciliations, physical safeguards - to prevent error and fraud.
- Accounting software automates posting but still needs controls and review.
Traps in questions
- Confusing financial vs management accounting (external/historical vs internal/forward-looking).
- Thinking a trial balance proves everything is correct - it only proves debits equal credits; it will not detect all errors (e.g. a transaction posted to the wrong account on both sides).
- Mixing up the sales ledger (receivables - money owed to us) and purchase ledger (payables - money we owe).
- Forgetting that segregation of duties is a control, not an accounting record.
Rule of thumb
Ask who is the report for? External parties → financial accounting. Managers → management accounting.
Worked example: Preparing a budget for next year's costs is management accounting; producing the year-end statement of financial position is financial accounting.