2 Functions of Accounting (Historical and Managerial)

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

Table of Contents

Historical functions of accounting

The historical function includes recording, classifying, summarizing, analyzing, and interpreting 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 a 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 in one place. This work is done in a book called a 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 the 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 the 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

The managerial function of accounting is concerned with accounting information, which is useful to management in performing its functions effectively. Planning, organizing, 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.

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2 Functions of Accounting (Historical and Managerial Function)