5 Functions of Accounting

Accounting in a very simple sense is maintaining a record of varied activities. Thus, Accounting is some things that are used almost by everyone in their daily lives. In our lifestyle, we maintain a record of varied transactions or activities. The Main Functions of Accounting are as follows

Functions of Accounting

Record of Transactions: Accounting provides a systematic record of the financial transactions of a business. This is because the records so maintained follow a well-developed system of principles and conventions which render uniformity and authenticity to them. For example, Furniture was purchased for cash. This is a financial transaction because here the exchange of an asset (i.e. Furniture) is taking place in lieu of cash. Hence, this will be recorded in the books of accounts and will provide evidence of the purchase.

Ascertaining the results of the business: To ascertain how well the business is doing we prepare certain financial statements. They are called statements because they are prepared for a certain period which is usually a year. It is important to prepare them because they provide conclusive evidence that a business is doing well. We prepare the following as our financial statements:

  • Profit and Loss Account: It is the income statement of the business and tells about whether a profit or loss has been incurred during the accounting year.
  • Balance Sheet: As we know, a business owns certain items and also borrows funds from outsiders. The position of these assets (i.e. owned by the business) and liabilities (i.e. owes to outsiders) is determined by the balance sheet.

Compliance with the law: Accounting provides the desired record needed to pay for indirect and direct taxes as per the law. A well-maintained record is accepted by the authorities without a dispute and ensures compliance with the law. For e.g.: An income tax return (i.e. statement declaring the revenues or incomes) can be prepared only when all transactions generating the revenues have been recorded as and when they have occurred.

Providing information to the users: Accounting provides the desired information to the users like shareholders, government, employees, etc.

Helps with the Managerial Decisions: All important decisions related to the business are taken by the managers just like parents make decisions for their kids when they are small. These decisions are taken after deliberation and are supported by the information provided through accounting. For example, the decision to increase the price of goods being sold will depend on the previous year’s revenue that we want to increase.

Also, Read What is Accounting?

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