Accounting is a social service.
Collecting information regarding economic activities, keeping accounts of financial transactions of an organization for taking decision relating to future plan of action and providing necessary information regarding debts, liabilities, property-assets, investment, capital/profit – loss and income-expenditure etc. to the interested parties like employees, investors, creditors, purchasers, government etc. willing to know the financial position of an organization.
In this regard;
AICPA has stated that the functions of Accounting are related to those statements which provide information of economic entity mainly measurable in terms of money that will be used in taking decision for future plan of action from various alternatives.
Therefore, from this view and general activities of Accounting;
It is clear that the functions of Accounting are
- classification and
- summarization of transactions
- ascertainment of results
- exhibition of financial position of an organization
- communication of necessary information derived from interpretation
- analysis to the interested parties including the management.
Carter in his Advanced Accounts has also divided the functions of Accounting into two parts –
(a) permanent recording of financial transactions of a business,
(b) exhibiting the financial impact of each transaction or collective transactions over financial position of interested parties.
Yorston, Smyth and Brown have divided functions of Accounting in two groups;
(1) Historical or stewardship functions and
(2) Managerial functions. These are listed below;
Seven Historical or Stewardship Functions of Accounting
Accountant is generally regarded as steward of all economic activities of a business concern. As a steward he is supposed to be responsible for all economic activities of a business concern.
For discharging his responsibilities he keeps accurate accounts of all financial transactions of his business and these are regarded as stewardship functions of accounting.
Stewardship functions are discussed below in brief.
1. Recording of financial transactions
The primary function of Accounting is to record the transactions in journal as soon as they occur. If the transactions are journalized it becomes easier to transfer them in ledger accounts.
After journalizing the transactions these are classified and recorded in ledger separately.
After recording the transactions in the ledger these are closed by drawing balances. A brief statement is prepared with the balances of ledger which is called trial balance.
4. Finding net results
The main function of Accounting is not only to record the transactions in books of accounts but also to determine the net results of a business for a particular period at the end of that period.
Income statement is prepared with the help of revenue incomes and expenses mentioned as ledger balances in the trial balance in order to find out operating results of a business organization for a particular period.
So preparation of income statement is treated as one of the important functions of Accounting.
5. Exhibiting financial affairs
Preparation of balance sheet is one of the functions of special importance of Accounting. Balance sheet is prepared to exhibit the financial position of an organization at a particular date.
A picture of assets and liabilities is reflected through balance sheet and a clear conception can be achieved regarding financial stability of an organization through it.
6. Analyzing financial data
The financial data derived from financial statements are interpreted and analyzed for different purposes.
From this information a clear conception is achieved regarding capability of repayment of debts, capability of earning profit, work efficiency and transparency etc. of an organization.
This can be ascertained through ratio- analysis.
For example, debt paying capability is measured through current ratio.
7. Communicating financial information
Interested parties related to business organization such as owners, employees, suppliers, investors, researchers, government etc. remain eager to know various information regarding financial positions of that organization.
One of the main functions of Accounting is to provide them with information regularly through various reports.
Five Managerial Functions of Accounting
The management is to take various decisions for smooth running of the business. These decisions are taken on the basis of evaluation of past activities.
Accounting provides reports of past financial activities which are made suitable for decision-making through analysis. These activities of Accounting are regarded as managerial functions. These functions are discussed below:
1. Control of financial policy and formation of planning
Various financial information are presented before the management so that the management can control financial policies and formulates planning regarding future activities and course of action.
2. Preparation of budget
Preparation of estimated statement of income and expenditure on the basis of future activities is also one of the important managerial functions.
Accounting provides necessary financial information required for preparation of this budget. Later on executed activities are compared with budgetary elements.
3. Cost control
A standard cost is estimated ahead against each cost. For this purpose the necessary financial information is available from accounting records.
Actual cost and standard cost are compared for evaluating efficiency of work. In this way cost control is possible.
4. Evaluation of employees’ performance
Assigned tasks of employees of every, department of an organization are to be evaluated. For this, Accounting provides necessary information.
5. Prevention of errors and frauds
Through accounting system the activities of employees are checked to prevent errors and frauds.