Accounting is concerned with identifying, recording and communicating financial information. Functions of Accounting may be classified into two distinct groups, such as:-
- Historical Functions and
- Managerial Function
Historical functions of accounting
Historical function includes recording, classifying, summarizing, analyzing and interpreting the past business transactions. For an accounting period of an enterprise. These are discussed below:
- Recording: Transactions or economic events, which can be measured in terms of money, are analyzed and recorded in books in an orderly manner. The recording is the basic function of accounting. The recording is done in the journal. Journal may be the general journal or special journal like Cashbook, Purchase books, etc.
- Classifying: Classification is the systematic analysis of recorded data with a view to grouping entries of one nature at one place. This work is done in the book called ledger. Which contains on different pages individual account heads under which all entries or transactions of similar nature are posted?
- Summarizing: Accounts in the ledger represent assets, liabilities, revenues, expenses and owner’s equity. The balances of different accounts are classified and taken to trial balance and then presented in suitable forms so that net result of the activities of an enterprise can be ascertained. The income statement is prepared with revenue and expense accounts where from net income of a period is known. The balance sheet is made which shows assets, liabilities, retained earnings and owner’s equity. Practically this is summarizing and communicating functions of accounting.
- Interpreting: If desired analysis of items in the income statement and balance sheet by calculating different ratios, percentages etc. May be made, on the basis of those ratios and percentages the user of accounting information can make a meaningful judgment about the liquidity, profitability and long-term solvency of the business enterprise.
Managerial functions of accounting
Managerial function of accounting is concerned with accounting information, which is useful to management in performing its functions effectively. Planning, organizing and directing and controlling are the main functions of management. Nowadays accountants help management in the performance of those functions by providing different financial data through various internal reports.
Those reports are special purpose reports and contain information that is relevant to any decision making. Data concerning the cost of products, the behavior of costs and expenses as activity level change.
Data from preparation of budget, report of actual performance and its comparison with budget or standard cost, alternative course of action and difference in cost thereof, cost and revenue of adding new product line or change of revenue if any product is dropped or change mix report on effect of change in financing mix or alternative source of funds etc. are provided by accounting.
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