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Accounting and its

Functions
Introduction-Definition
Accounting is often called the language of business.
Its purpose is to communicate or report the results
of business operations and its various aspects.
It is the process of identifying, measuring and
communicating economic information to
permit informed judgments and decisions by
users of the information.
Objectives Of Accounting
The following are the objectives of accounting:
To record the business transactions in a
systematic manner.
To determine the gross profit and net profit
earned by a firm during a specific period.
To know the financial position of a firm at the
close of the financial year by way of preparing
thebalance sheet
Objectives Of Accounting
Tofacilitate managementcontrol.
To assess the taxable income and the sales tax
liability.
To provide requisite information to different
parties, i.e., owners, creditors, employees,
management, Government, investors, financial
institutions, banks etc
Limitations Of Accounting
Accounting suffers from the following limitations:
Accounting information is expressed in terms of
money. Non monetary events or transactions,
however important, are completely omitted.
Fixed assets are recorded in the accounting records at
the original cost, that is, the actual amount spent on
them plus all incidental charges. In this way the effect
of inflation (or deflation) is not taken into
consideration. The direct result of this practice is that
balance sheet does not represent the true financial
position of the business.
Accounting information is sometimes based on
estimates; estimates are often inaccurate.
Limitations Of Accounting
Accounting information cannot be used as the only
test of managerial performance on the basis of more
profits. Profit for a period of one year can readily be
manipulated by omitting such costs as advertisement,
research and development, depreciation and so on.
Accounting information is not neutral or unbiased.
Accountants calculate income as excess of revenues over
expenses. But they consider only selected revenues and
expenses. They do not, for example, include, cost of such
items aswater or air pollution, employees injuries, etc.
Accounting like any other discipline has to follow
certain principles, which in certain cases are
contradictory. For example current assets.
Functions Of Accounting
The following are the functions of accounting:
a. Recording: Accounting records business
transactions in terms of money. It is essentially
concerned with ensuring that all business
transactions of financial nature are properly
recorded. Recording is done in journal, which is
further subdivided into subsidiary books from the
point of view of convenience.
b. Classifying: Accounting also facilitates classification of
all business transactions recorded in journal. Items of
similar nature are classified under appropriate heads.
The work of classification is done in a book called the
ledger
Functions Of Accounting
The following are the functions of accounting:
c.Summarizing: Accounting summarizes the classified
information. It is done in a manner, which is useful to the
internal and external users. Internal users interested in
these informations are the persons who manage the
business. External users of information are the investors,
creditors, tax authorities, labour unions, trade
associations, shareholders, etc.
d.Interpreting: It implies analyzing and interpreting the
financial data embodied in final accounts. Interpretation
of the data helps the management, outsiders and
shareholders in decision making.
Systems Of Accounting
The following are the basic systems of recording
business transactions:
i.Cash Basis Accounting: According to this system, only
actual cash receipts and payments are recorded in the
books. The credit transactions are not recorded at all, till
actual cash is received or paid. Thus, if purchases are
made in the year 2002 on credit and payment for
purchases is made in the year 2003, such purchases shall
be considered to be an expense of the year 2003 and
shall not be recorded in the year 2002. This system of
accounting is mostly followed by non-trading
organizations, professionals like lawyers, doctors,
chartered accountants, etc.
Systems Of Accounting
ii.Mercantile or Accrual System: According to this
system, all the business transactions pertaining to the
specific period, whether of cash or credit nature, are
recorded in the books. This system of accounting is
based on accrual concept, which states that revenue is
recognized when it is earned and expense is recognized
when obligation of payment arises. Actual movement of
cash is irrelevant. Mercantile system of accounting is
widely followed by the industrial and commercial
undertakings because it takes into account the effects of
all transactions already entered into.
Systems Of Accounting
iii.Mixed System: Mixed system is modified form of pure-
cash-basis accounting. Because of the fact that pure cash
basis would result in balance sheet and income
statement with limited use, it necessitates the need of
mixed accounting in which some items (especially sales
and period costs are treated on cash basis and some
items (especially product costs and long-lived assets) are
treated on accrual basis.
People Interested
Shareholders: Since shareholders have invested in the
company so they are interested in the financial
statements.
Creditors: Creditors may be short-term or long-term. The
main concern of the creditors is focused on the credit
worthiness of the firm and its ability to meet its financial
obligations. They are therefore concerned with the
liquidity of the firm, its profitability and financial
soundness.
Management: Management requires accounting
information for planning, organizing, and control
purposes. The emphasis on efficient & effective
management of organizations has considerably extended
the demand for accountinginformation.
People Interested
Employees: The importance of harmonious industrial
relations between management & employees cannotbe
over-emphasized. The employees have a stake in the
outcomes of several managerial decisions. Greater
emphasis on industrial democracy through employee
participation in management decisions has important
implication for the supply information toemployees.
Matters like settlement of wages, bonus, &profit sharing
rest on adequate disclosure of relevant facts.
Government: Government uses financial information for
compiling statistics concerning calculation of
profitability, taxes, computation of national income, and
determination of the industrialgrowth.
People Interested
Stock Exchanges: Several stock exchanges also require
accounting information for listing of securities.
Consumers & Others: Consumer organizations, media,
welfare organizations and public at large are also
interested in condensed accounting information in order
to appraise the efficiency and social role of the
enterprises in different sectors of theeconomy.
Role Of Accountant
Writing up accounts and preparing financial
statements.
Audit of accounts.
Role as a management accountant.
Help to government, income tax, revenue
department.
Role as cost accountant.
Role in merger liquidation.