Accounting is useful to the management as well as to other users such as owners, creditors, investors, government and others. It provides information regarding the status of the organization and results of its operations.
The following are the functions of accounting:
Recording of information: Accounting is an art of recording financial facts of an organization. As it is not possible to remember each and every transaction of the business it is necessary to supplement human memory. The information is recorded in various books. The books to be maintained in an organization may be purchase book, sales book, purchase returns book, sales returns book, cash book etc.
Classification of data: The classification data means that the data of one nature is placed atone place. This is done in a book which is called „Ledger‟
For example: Salaries, Rents, interest, Assets, Liabilities etc. These accounts will be opened in the ledger under various heads relating to these accounts and entries will be posted into these accounts.
Making summaries: Another function of financial accounting is to summarize the recorded data. The classified data is used to prepare final accounts i.e. profit and loss account and balance sheet. The profit and loss account is the summary of various revenue items and expenditure items and the balance sheet is the summary of various assets and liabilities.
Dealing with financial transactions: Only those transactions which can be measured in terms of money are recorded. Anything which can not be measured in terms of money does not form a part of financial accounting.
Interpreting financial information: Accounting information is modified in such a way that it is interpreted by the users for drawing conclusions. The users such as creditors investors, bankers shareholders are able to form an opinion about the profitability and financial position of the business.
Communicating results: Financial accounting is not only concerned with the recording data but also concerned with communication of results. The profitability and financial position of the organization are communicated through profit and loss account and balance sheet. This information is supplied at regular intervals.
Providing reliable information: Another important function of financial accounting is to make the information more reliable and useful. This is done by adopting internationally accepted accounting standards for the preparation of accounts.
