Functions of Accounting
- Maintaining systematic records: The basic function of accounting is to maintain proper records of transactions that take place in chronological order. These records provide a base analysis and decision-making. It consists of recording in the original/subsidiary books of entry, posting to ledger, preparation of trial balance and final accounts.
- Meeting legal requirements: Under the provision of law, a business person 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.
- Protecting and safeguarding business assets: Records always serve as an evidence in case of any dispute relating to ownership title of any property or assets of the business. Accounting helps in this regard to a very great extentit protects the property of business from unjustified and unwanted use. The accounts manager thus has to design such a system of accounting, which protects its assets from an unjustified and unwanted use.
- Accounting helps to very great extent in decision-making: The accounting facilitates theright decision-making process. Most of the managerial decisions are based on the figures. An effective price policy, satisfied wage structure, inventory policy, advertisement and sales promotion policy are a result of proper accounting structure. Accounting provides necessary data on which managerial decision-making process is based.
- Communicating and reporting: Accounting can be said to be the language of business. All the transactions of business are communicated through accounting. All the interested parties such as entrepreneur, creditors, governments, and employees and so on, who are interested directly or indirectly in knowing the results of the firm are provided information through accounting. Accounting communicates the results to interested parties. Accountant prepares report based on accounting information to
show financial position of firm to interested parties. Thus, accounting shows a true and fair financial position of firm.
Users of Accounting Information
Accounting information is of prime importance to its interested parties to understand the financial position of firm and its future prospects. The interested parties or users of accounting can be divided into two main categories namely, external and internal users.
- Creditors: People who have extended credit to the company are termed as creditors. They are eager to know the financial position of firm to determine whether the enterprise will be able to meet its obligations in time. The statement of accounts helps to determine a liquidity position on which creditors can rely upon and check their credit policy or supply decisions.
- Investors: These individuals put their money in any business with the aim of making more money. Any investor before making investments considers three important factors i.e. safety of his principle amount, Rate of return on his investment in the form of dividend/interest and Regular and consistent rate of return. Detailed study of the financial statements of firm enables investor in taking correct investment decision.
- Government: The government is not interested in making money or investments. It is concerned with accounting information of company for purpose of taxation, labour and corporate law. Thus, it is interested in allocation of resources, taxation policies and statistical interests.
- Bankers: Banks and financial institutions who lend money to business want to know the financial stability of the company in terms of the company‟s ability to pay interest and principle amount. They want to know whether this company can turn into a defaulter if so banks would not want to lend to such company. Thus before lending money, banks want to be sure of the financial status of the company through its financial statements.
- Competitors: Competitors of the company are interested in its financial to improve its own strategies, policies and ystems.Comparison of one company with another can provide valuable clues about the financial health of the organisation. It helps to benchmark its own financial results.
- Others: In addition to the above, other users of accounting information are researchers, consumers, stock exchange, brokers, underwriters, economists, press and public in general. However, their interests and goals altogether being different in nature, yet require accounting information for serving their own interests.
Internal Users Include :
- Owners: Owners include shareholders, partners and proprietors of the firm. They are the backbone of the business in the sense that they provide necessary funds for its smooth running, growth and development. Company‟s profitability and financial security are, therefore of prime importance to these people who have stake in the business. Such information can be obtained through published accounts, annual report and other supplementary statements.
- Management: Accounting provides necessary information for managerial decision-making. The managerial tools, such as production budget, sales budget and cash budget, capital budget, etc., are the result of efficient accounting system. Various functions of management such as planning, organising, coordination, motivation and control can be implemented effectively through proper accounting system.
- Employees: Healthy industrial relations between employer and employee are important to growth and development of firm. Accounting information helps to settle industrial disputes, prevent strike or likewise situation arising from demand for wage hike, bonus, higher compensation, etc. It helps employees to determine whether they are paid fair wages or not. Sometimes employees are given shares of the company in which they work. Thus, accounting information becomes vital for them too.
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