Accounting Definition, Function and others

Learning Objectives:

1. Define and explain accounting.
2. What are the main functions of accounting?

Accounting is defined as "the art of recording, classifying and summarizing in terms of money transactions and events of a financial character and interpreting the results thereof."

An analysis of the definition of accounting brings the following functions of accounting.

Recording:

This is one of the basic functions of accounting. Recording means to put the transaction to writing in books of accounts. It is essentially concerned with not only ensuring that all business transactions of financial characters are infact recorded but also that they are recorded in an orderly manner. Recording is done in the book - "journal". This book is further subdivided in various subsidiary books such as cash journal, purchases journal, sales journal etc. The number of subsidiary books to be maintained will be according to the nature and size of the business.

Classifying:

Classification is the process of grouping of transactions or entries of one nature at the place. The work of classifying is done in the book termed as "Ledger".

Summarising:

This involves presenting the classified data in a manner which is understandable and useful to management and other interested parties. This involves the preparation of at least two statements: (1) trading and profit and loss account and (2) balance sheet.

Deals with Financial Transactions:

Accounting records only those transactions and events in terms of money which are of financial character. Transactions which are not of a financial character are not recorded in the books of accounts. For example if a company has got a team of dedicated and efficient employees, it is of great use to the business but since it is not of a financial character and capable of being expressed in terms of money, it will not be recorded in the books of the business.

Interprets:

This is final function of accounting. Accounting not only creates data through recording, classifying and summarizing events but also uses them by interpreting. The recorded financial data is interpreted in a manner that the end users can make a meaningful judgment about the financial conditions and profitability of the business operations. The data is also used for preparing the future plans.

Branches of Accounting

Learning Objectives:

1. What are the branches of accounting?

Accounting has three main forms of branches, viz, financial accounting, cost accounting, and management accounting. These forms of accounting have been developed to serve different types of objectives.

Financial Accounting:

It is the original form of accounting. It is mainly confined to the preparation of financial statements for the use of outsiders like creditors, banks and financial institutions etc. The chief purpose of financial accounting is to calculate profit or loss made by the business during the year and exhibit financial position of the business as on a particular date.

Cost Accounting:

Function of cost accounting is to ascertain the cost of the product and to help the management in the control of cost.

Management Accounting or Managerial Accounting:

It is accounting for management. i.e., accounting which provides necessary information to the management for discharging its functions. It is the reproduction of financial accounts in such a way as will enable the management to take decisions and to control various business activities.

Functions of Accounting:

Learning Objectives:

1. What are the important functions of accounting.

Record Keeping Function:

The primary function of accounting is to keep a systematic record of financial transaction - journalisation, posting and preparation of final statements. The purpose of this function is to report regularly to the interested parties by means of financial statements.

Protect Business Property:

The second function of accounting is to protect the property of business from unjustified and unwanted use. The accountant thus has to design such a system of accounting which protect its assets from an unjustified and unwanted use.

Legal Requirement Function:

The third function of accounting is to devise such a system as will meet the legal requirements. Under the provision of law, a business man has to file various statements e.g., income tax returns, returns for sales tax purpose etc. Accounting system aims at fulfilling the requirements of law. Accounting is a base, with the help of which various returns, documents, statements etc., are prepared.

Communicating the Results:

Accounting is the language of business. Various transactions are communicated through accounting. There are many parties - owners, creditors, government, employees etc, who are interested in knowing the results of the firm. The fourth function of accounting is to communicate the results to interested parties. The accounting shows a real and true position of the firm of the business.

Parties Interested in Accounting Information:

Learning Objectives:

1. Explain, who may be interested in accounting information of a company or firm?

There are a number of parties who are interested in the accounting information relating to business. Accounting is the language employed to communicate financial information of a concern to such parties. The following are the groups who like to make use of the accounting information.

Owners:

The owner provides funds or capital for the organization. They want to know whether their funds are being properly used or not. They need accounting information to know the profitability and the financial position of the concern in which they have invested their funds. The financial statement prepared from time to time from accounting records tell them the profitability and the financial position.

Management:

Management is the art of getting things done through others. The management should ensure that the subordinates are doing work properly. Accounting information is an aid in this respect because it helps a manager in appraising the performance of the subordinates. Accounting information provides "the eyes and ears to management".

Creditors:

Creditors are the persons who supply goods on credit or bankers or lenders of money. They want to know the financial position of a concern before giving loans or granting credit. They want to be sure that the concern will not experience difficulty in making their payment in time i.e., liquid position of the concern in satisfactory. To know the liquid position, they need accounting information.

Employees:

Employees are interested in the financial position of a concern they serve particularly when payment of bonus depends upon the size of the profits earned. The demand for wage rise, bonus, better working conditions etc. depends upon the profitability of the concern and in turn depends upon financial position. For these reasons, this group is interested in accounting information.

Government:

The government is interested in accounting information because it wants to know earnings or sales for a particular period for the purpose of taxation. Government also needs accounting information for compiling statistics concerning which in turn helps in compiling national accounts.

Consumers:

Consumers need accounting information for establishing good accounting control so that cost of production may be reduced with the resultant reduction of the prices of goods they buy. Sometimes, prices for some goods are fixed by the government, so it needs accounting information to fix reasonable prices so that consumers are not exploited.