Accounts and its functions

1. Accounts and its Functions

2. 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. 

3. Objectives Of Accounting The following are the objectives of accounting : a . To record the business transactions in a systematic manner. b . To determine the gross profit and net profit earned by a firm during a specific period. c .  To know the financial position of a firm at the close of the financial year by way of preparing the balance sheet

4. Objectives Of Accounting The following are the objectives of accounting : d . To facilitate management control. e .  To assess the taxable income and the sales tax liability. f .   To provide requisite information to different parties, i.e., owners, creditors, employees, management, Government, investors, financial institutions, banks etc

5. Limitations Of Accounting Accounting suffers from the following limitations : i .  Accounting information is expressed in terms of money. Non monetary events or transactions, however important, are completely omitted. ii . 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. iii .Accounting information is sometimes based on estimates; estimates are often inaccurate.

6. Limitations Of Accounting iv . 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. v . 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 as water or air pollution, employee’s injuries, etc. vi . Accounting like any other discipline has to follow certain principles, which in certain cases are contradictory. For example current assets.  

7. The following are the functions of accounting :   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.    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

8. 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. Functions Of Accounting

9. 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

10. 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

11. 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. Systems Of Accounting

12. 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 accounting information. People Interested

13. Employees: The importance of harmonious industrial relations between management & employees cannot be 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 to employees. 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 industrial growth. People Interested

14. 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 the economy.   People Interested

15. 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. Role Of Accountant